Fannie, Freddie Still Dominate, But More Life Insurers, Banks Are Pumping More Capital into the Market
For the first time in more than a decade, apartments have replaced office buildings as the top investment sector for commercial real estate
in the United States, and with that demand has come a commensurate need for debt capital and a growing source of lenders to fill the need.
New development of multifamily space across the U.S. has been unabashedly robust over the past year, leaving many anxious about the impact the new supply will have on market conditions. However, according to Jones Lang LaSalle, reports of overbuilding in the apartment sector are greatly exaggerated, as the number necessary to sustain demand fell short by 100,000 units last year, pointing to a healthy outlook for 2013 and well into 2014.
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“The multifamily market is still playing catch-up, as supply remains depleted. Development will continue to grow at a solid pace in 2013 with approximately 260,000 units expected to come online, while demand requirements outpace the supply pipeline. This year, expected deliveries of new product will be 12% below historical average delivery levels,” said Jubeen Vaghefi, international director and leader of Jones Lang LaSalle’s Multifamily Capital Markets.
Vacancy levels are also still falling. The national vacancy rates in the fourth quarter 2012 was 8.7% for rental housing and 1.9% for homeowner housing, the Department of Commerce’s Census Bureau reported this. The rental vacancy rate of 8.7% was 0.7 percentage points lower than the rate in the fourth quarter 2011.
And according to CoStar Group, multifamily sales in 2012 were up 24% in 2012 compared to 2011 -- $80.9 billion in deals compared to $65.1 billion.
While the Government-Sponsored Enterprises including Fannie Mae and Freddie Mac will continue to dominate the financing landscape for multifamily properties in 2013, Jones Lang LaSalle is seeing more lenders, including life companies, national banks, financial institutions and CMBS, increase their market share.
“Plentiful capital, ease of execution, and the ‘sweet spot’ in the 7- and 10-year, fixed-rate, 80% LTV financings kept the agencies on top in 2012,” said Faron Thompson, international director and leader of Jones Lang LaSalle’s Freddie Mac Program Plus lending business.
Added Holly Minter, executive vice president, Jones Lang LaSalle, “We expect those numbers will continue to rise this year by about 10% to 15% for both Freddie and Fannie, but life companies, balance sheet lenders and CMBS lenders are increasingly muscling their way into the scrum with higher leverage, creative pre-payment structures and shorter loan terms.”
The Mortgage Bankers Association (MBA) is forecasting multifamily originations at $100 billion in 2013.
“2012 was a strong year for the commercial and multifamily mortgage markets, and 2013 is shaping up to continue the growth,” said Jamie Woodwell, MBA’s vice president of commercial real estate research. “Despite a 21% decline in the volume of commercial and multifamily mortgages maturing this year, we expect origination volumes and the amount of mortgage debt outstanding will both increase. Our forecast anticipates Fannie Mae, Freddie Mac and FHA, as well as life insurance companies, will all continue to have strong appetites for making loans, and - coupled with growth in originations for CMBS - the total market will continue to expand.”
Prudential Mortgage Capital Co., the commercial mortgage lending business of life insurer Prudential Financial Inc., is one of those stepping up its multifamily activity.
Prudential Mortgage Capital provided $12.2 billion in financing for commercial mortgages globally in 2012 and has as much as $13 billion available for financing in 2013.
“In 2013, we will continue our focus on growth with special emphasis on our portfolio program, our Agency Gateway Program for multifamily properties, our FHA healthcare lending initiative, our CMBS program and expansion of production in Europe and Japan,” said David Durning, senior managing director and head of originations for Prudential Mortgage Capital, who will become president of the business in April.
On the banking side, there is a growing band of regional banks jumping into the property, including New York Community Bancorp. The bank originated $5.8 billion in multifamily loans in the New York region last year.
According to Thomas Cangemi, CFO of the bank holding company, it’s not that the company hasn’t had losses on the book in the past few years on multifamily but it didn’t have a lot of losses.
“So we look at it as a very attractive asset,” Cangemi said recently in the company’s quarterly conference call. “We learned the business. When it’s done correctly and we you have a very strong loan book and you look at historical losses compared to our niche product, [it’s a low loss business]. So we are very comfortable where we are.”
“I think the reality is that we’ve been consistently in this market and we’ve grown to be the largest lender in our niche,” Cangemi said. “Cycle after cycle after cycle, there has been people that have indicated that they are doing multifamily lending in New York. And many of the cycles that have unfortunately evolved, have caused those people to go out of business because they did bad multifamily lending in New York. So, I think the idea that we are very, very focused as to the kind of people that we lend to and the kind of metrics that we use in putting a loan on our books, gives us very consistent results.”
Fannie Mae, Freddie Mac Still Dominate Multifamily Lending
Together, government sponsored agencies Fannie Mae and Freddie Mac pumped $62.6 billion last year into the multifamily markets.
Fannie Mae provided $33.8 billion in financing --, the third highest acquisition year in its history. The company remained the largest source of multifamily financing in 2012, working with lender partners to finance nearly 560,000 units of multifamily housing.
Freddie Mac (had a record $28.8 billion in volume for its multifamily business (loan purchase and bond guarantee volume), a 42% increase compared to $20.3 billion in 2011. The previous multifamily business activity record was $24 billion in 2008. This volume includes Freddie Mac’s targeted affordable housing products, which finance apartments that receive some form of local, state or federal government subsidy.
"In 2012 the multifamily market was strong, with solid fundamentals remaining in place," said Fannie Mae’s Jeffery Hayward, senior vice president, head of the multifamily mortgage business. "Private capital continued to return to the market, an important step to restoring a more normal lending environment. Having a balanced market with diverse sources of liquidity and credit means the whole market is healthy and everyone is doing their part. We look forward to continuing our work to provide liquidity, stability and affordability to the rental housing market."
David Brickman, senior vice president of Freddie Mac multifamily, said: “It was a phenomenal year for us and the sellers and servicers in our network. We achieved record volume while maintaining strong credit discipline and providing essential liquidity to the growing multifamily mortgage market. In the fourth quarter we completed about 33% of our yearly volume -- approximately $10 billion in multifamily mortgages.”
“We are now in the securitization market every day, with new issuances every two to three weeks, Brickman added. “In the four years since the program’s inception, we’ve securitized $44 billion in mortgages backed by 5-, 7- and 10-year collateral, as well as floating rate mortgages. We anticipate an increase in securitizations this year with 10-year mortgage loans being the predominant loan type as borrowers lock-in the low interest rates.”
Latest Freddie Mac CMBS Deal
Separately, Freddie Mac hit the streets this week with its second multifamily-backed securities of this year. The $1.3 billion K-025 Certificates are backed by 83 recently-originated multifamily mortgages.
The certificates include loans that have principal balances ranging from $1.5 million to $91.7 million for the largest loan, which is secured by the fee simple interest in The Colorado (6.0%), a 256-unit high-rise apartment complex in New York, NY. The top five loans represent 19.6% of the pool cut-off balance, and include Saybrook Pointe Apartments in San Jose, CA (4.2%), Falls of Pembroke Apartments in Pembroke Pines, FL (3.2%), Abbey at Eldridge in Houston, TX (3.2%) and Grosvenor Towers in Bethesda, MD (3.0%). The properties are in 25 states, with the three largest concentrations in Texas (14.2%), Florida (11.6%) and Maryland (9.6%).
CBRE Capital Markets funded a $91.7 million first mortgage loan to refinance existing debt encumbering the borrower’s fee simple interest in The Colorado, a 256-unit, high-rise multifamily building on New York’s Upper East Side.
CBRE Capital Markets also funded a $65.2 million first mortgage loan to refinance existing debt encumbering the borrower’s fee simple interest in Saybrook Pointe, a 324-unit, garden-style multifamily complex in San Jose.
Walker and Dunlop funded a $49 million first mortgage loan to refinance existing debt encumbering the borrower’s fee simple interest in Pembroke Pines, a 450-unit, garden-style multifamily complex in Pembroke Pines, FL, in the Fort Lauderdale CBD.
CBRE Capital Markets funded a $48.8 million first mortgage loan to refinance existing debt encumbering the borrower’s fee simple interest in Abbey at Eldridge, a 760-unit, garden-style multifamily complex in Houston.
Jones Lang LaSalle funded a $46.5 million first mortgage loan to finance the borrower’s acquisition of the fee simple interest in Grosvenor Towers, a 237-unit, high-rise multifamily complex in North Bethesda, MD, in the Washington, DC, metro area.
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