Even though Washington, D.C.’s economy is driven in large part by the federal government, when it comes to multifamily deals, the government entities Fannie Mae and Freddie Mac, are often losing out.
“The life insurance companies have been beating the agencies by a far amount,” said Brian V. Casey, regional director for MetLife Real Estate Investments, who said he won more multifamily deals in 2010 than he typically does during a capital markets panel at an Urban Land Institute real estate conference in Washington, D.C., earlier this week. “It will only be a matter of time before it feels like 2005.”
The panel spent a lot of time talking about bubbles in hot markets such as Washington, D.C., New York, and San Francisco. “We’re seeing people factor in higher rates of growth than 3 percent,” said Chip Lippman, director of The Carlyle Group. “In certain markets, it may be warranted, but the core markets seem like they’re fully priced to us.”
But the conduit side of the house still remembers the lesson of the downturn, according to Greta Guggenheim, president and co-founder of New York-based Ladder Capital. She said that no one was using pro forma rents, and the provider of the B-piece of the loans is still diligent about keeping underwriting discipline. “We don’t see the conduit world going to the aggressive underwriting of 2006 and 2007,” she said.
Casey thinks the search for yield could eventually drive development. He said that he knows of 10 projects in the D.C. area that could start if lenders just flipped the switch. That day could be approaching fast. “Once they get tired of a 4.8 [percent] coupon, they’ll go down the risk spectrum for construction,” he said.
Casey said his group actively stresses test deals to see if how they hold upon exit, especially if Fannie and Freddie suddenly go away, valuations change, or exit cap rates become even less predictable. “We have concerns if Fannie and Freddie aren’t around,” Casey said. “There are only a percentage of multifamily where we [the insurance market] can fill the gap that Fannie and Freddie filled.”
The exit risk could be exacerbated by the sheer amount of CMBS loans that could hit the market. Moderator and senior fellow at ULI Stephen Blank said that multifamily currently has the highest 30-day-late delinquencies at 16.48 percent in commercial real estate and called the CMBS issue a “black hole” facing commercial real estate.
Right now, the bailout for these loan problems are coming from a number of sources with 63 percent getting extensions with modifications, 7 percent getting extensions without modifications, 14 percent being sold to third parties, and 16 percent going into foreclosure.
“There’s tremendous amount of capital out there to take the mezzanine and preferred pieces in these loans,” Guggenheim says.