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Multifamily Borrowers Beating Path to Banks

Maturing Market Has Lenders Searching for New Hot Loan Product, Could Single-Family Development Be Next?
April 23, 2014
Bankers appear to be of two minds when it comes to the hot multifamily market. Many are lending aggressively while demand is strong, while some say they are starting to back off a little because of the intense competition for business.

Multifamily construction has remained strong in major markets across the country, according to bankers discussing their first quarter performance, including such major markets as New York, the Mid-Atlantic, Atlanta, Chicago, Dallas and San Francisco.

Bankers across other regions of the country also reported loan demand growth as well. After not seeing its commercial real estate loan total grow in more than four years, Regions Financial Corp., a bank holding company in Birmingham, AL, said its CRE portfolio grew in the first quarter this year by $242 million, with 40% of that growth attributed to multifamily originations. And it expects to continue that growth throughout the year.


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The reason for the renewed banking interest: multifamily demand has remained strong, helping to absorb newly built units, observed Luis Meija, CoStar Group director of U.S. research for multifamily property.

CoStar's statistics for 50-unit-plus apartment properties shows a gradually maturing cycle. Still increasing, annual average asking rent growth has moderated, dipping 3.4% in the second quarter of last year to this quarter. Vacancies have held fairly steady at 4.1% in the last two quarters after hitting 4% in third quarter last year, Meija noted.

"Although rents have yet to peak, decelerating rent growth, increasing vacancies, and increasing concessions are helping to define the market turning point," Meija said. "These conditions will continue to be the trend if supply keeps growing and outweighs the continuing steady demand. Alternatively, if demand holds strong and developers and creditors manage to keep supply growing at a reasonable pace, we may be in for a much more gradual turning point than some anticipated."

As Meija points out, the performance of property fundamentals to date have largely allayed concerns over the multifamily market overheating.

That is bearing out in the market as well. After noting that current construction levels of high-end apartments are excessive in relation to potential demand for such units, bankers in the Boston area indicated that recently delivered luxury apartment units appear to be fetching rents in line with the developers’ projections.

In New York, builders appear to be even increasingly more optimistic about the multifamily rental market.

In Manhattan, a shift in the sales mix towards larger apartments and new development has reportedly boosted dollar sales volume and exaggerated the price rise. Manhattan’s rental market, which is dominated by condos, remains on a plateau, while rents continue to rise briskly in Brooklyn, where most new development is rental housing.

Niche banks in the New York metro area appear to be particularly benefiting from the current lending environment.

Astoria Financial’s multifamily/commercial real estate mortgage loan portfolio totaled $4.2 billion at March 31, an increase of $73 million from year-end 2013. And multifamily makes up 34% of its total.

The bank is well on the way towards its 45%-plus target by year-end 2015, said Monte Redman, president and CEO of Astoria.

“In a very competitive environment for multifamily/commercial real estate lending, we are pleased that our pipeline grew by more than $135 million during the first quarter,” Redman said. "And we believe that the remainder of the year will provide us with increased loan originations, leading to net growth in the multifamily/commercial real estate portfolio similar to what we have achieved over the past two years.”

Asset quality of such concentrated loan portfolios focused on multifamily lending in New York City's highly regulated real estate market remains strong with very low levels of charge-offs, despite elevated balances of nonperforming assets, according to Fitch Ratings.

Fitch analyst added that the NYC multifamily market has historically been resilient to weaknesses in the economy given rent control regulations and a limited housing supply. The rating agency also added that it expects multifamily asset quality to continue to improve, albeit gradually.

Such outlooks have all types of lenders scrambling for business: CMBS conduit lenders, insurance companies and smaller community banks. And a low interest rate environment is driving demand to all of them.

That competition has New York state-based M&T Bank said it does not expect to see its CRE lending increase significantly because of plentitude of sources for capital.

"Unless any of us expect that to change soon, my sense is that it will be around for a while," said Rene F. Jones, CFO and vice chairman of M&T told investors. "Relative to one year ago or so, we see more and more people interested in that multifamily space. And I wouldn't expect that to change as well."

"Anecdotally I do think that it has a lot to do with a favorable risk weighting, which in our mind, it tends to create risk in some way," Jones said. "So in those cases, we would tend to back away from those things, if the pricing and structure starts to fall outside of what we're normally comfortable with."

Conditions are much the same in the Chicago region, where a decline in single-family construction is being accompanied by growing demand for new apartment projects as residential rents continue to increase, bankers said.

"There are apartment buildings going up left and right over the city," said Edward Wehmer, president and CEO of Wintrust Financial in Chicago. "It’s almost time to start counting the cranes again. Like I always say, when you count more than 10 cranes over The Loop, its time to hunker down. But, we are not at that level yet."

Bankers in Atlanta, San Francisco and Dallas indicated that much of the demand for and loan growth in multifamily is coming in core markets and in many cases from existing, experienced clients. Most of the new development is occurring mainly in urban-oriented markets and in-fill, close-in suburban locations.

"Multifamily is still strong, and I think it stays strong for next year or so," added Daryl Bible, CFO of BB&T Bank in Winston-Salem, N.C. "And then I think as the economics of single versus rental costs, you’ll see multifamily plateau. We’re making that shift now; we’re already focusing more on single-family A&D (acquisition and development) and construction to be ready for that impending change."


Keep up weekly on national news, trends and property leads with the Watch List Newsletter, a weekly pdf that includes other news and leads not found on the CoStar Group web news pages. Sign up for the Watch List E-Mail Alert. A new issue is published Monday mornings.


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