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Who’s Afraid of Multifamily?

Not the Nation’s Lenders, as Liquidity and Property Sales Remain on Previous Strong Pace
April 28, 2016
Liquidity in the multifamily real estate sector appears to be holding up, continuing to help drive sales of apartment properties, with sales remaining on last year’s record pace.

Multifamily deal volume in the first quarter of this year totaled $37 billion, almost exactly in line with the first quarter of last year, a quarter that kicked off a record year for apartment investment at $161 billion, according to John Affleck, a research strategist with CoStar Group.

"Multifamily’ s record of steady rent growth and low volatility position the asset type as an ideal defensive asset as the economic cycle extends into a seventh year,” Affleck said.

Opus Bank, a $7 billion bank based in Irvine, CA, reported this week that its multifamily funding is still on pace with last year.

“In spite of industry chatter about commercial and multifamily real estate, we have tremendous confidence in our ability to continue growing our leading multifamily lending platform,” Michael Allison, co-president of Opus Bank said this week.

"Credit metrics on our multifamily and CRE portfolios include attractive loan-to-value and debt coverage levels that have been sustained over the past few years and during the first quarter of 2016, aided by our markets that have rent control regulations,” Allison said.

There has been some reported weakness at the upper price-end of the multifamily market, largely the result of the predominance of that type among newly built properties, but it has not spilled over to the rest of the market.

"In the market that we are in, primarily low- to moderate income areas for multifamily, we have seen very little if any vacancies,” said Joseph DePaolo, president and CEO of Signature Bank, a major New York lender.

Signature grew its loan portfolio in the first quarter by more than 5% to more than $25 billion driven primarily by multifamily and CRE lending.

Gregg Gerken, head of commercial real estate at TD Bank, told CoStar that "affordability is still important. The higher the price, the smaller the pool of buyers. We see some weakness in the high-end condo market, and in the multifamily markets, Class A units are the norm.”

“Rent can only go so high,” Gerken added. “The ripple effect is that people look for neighborhoods that are affordable, giving up certain amenities in favor of lower rent.”

CoStar’s Affleck said that investment in multifamily continues to pencil-out for investors.

"Concerns around Class A assets should lead investors into Class B assets outside of prime locations, rather than away from multifamily altogether,” he said.

In a further potential boost to multifamily liquidity, Fannie Mae announced this week that it had issued $12.6 billion of multifamily mortgage-backed securities in the first quarter of 2016 compared to $10.4 billion in the same period last year.

"The beginning of 2016 was a turbulent time for global markets,” notes Josh Seiff, vice president of multifamily, capital markets & trading for Fannie Mae. “Our MBS execution and the Delegated Underwriting and Servicing (DUS) program risk-sharing model helped protect borrowers from the increased volatility we saw in the credit markets. Fannie Mae multifamily borrowers and lenders had great access to liquidity, investors purchased more than $15 billion in new issue securities and structured transactions in the first quarter of 2016.”

Fellow GSE Freddie Mac also appeared to be pacing ahead of its multifamily-securities issuance. Through the first four months of this year, Freddie Mac has announced pricing of nearly $14.8 billion in securities offerings. That is almost double the announcement of $7.7 billion for the same period last year.

Bankers still backing other CRE, but keeping eye on weakness in energy sectors.

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