As the last men standing in the multifamily debt game, Fannie Mae and Freddie Mac are single-handedly keeping apartment values from dropping to unrealistic levels.
Since the availability of debt impacts cap rates, the GSEs are staving off a steep market correction by ushering the multifamily industry into a slow, soft landing. If the free market were left to its own devices, the apartment industry would look much bleaker than it does today.
“No matter what your politics are, I think they’re propping up apartment values, just as they are in single-family,” said Michael Lowinger, a senior regional director with equity investor Wrigthwood Capital, at the recent Apartment Finance Today Conference. “But it’s dangerous when an industry only has two sources.”
It’s a delicate balancing act for the GSEs. The companies were founded on a government mandate to support the housing markets. Since the government now effectively owns the companies—and wants to prevent the multifamily industry from suffering the same fate as the single-family sector—that mandate is stronger than ever.
Because they have the market to themselves, every time they raise prices or further tighten underwriting, apartment cap rates are affected. So, by incrementally tightening up credit standards, the GSEs are ensuring a slow and steady fall in values, acting as placeholders until the rest of the debt industry re-emerges.
While multifamily has always been viewed as a less risky asset class than office and retail, a world without Fannie and Freddie would undoubtedly mean lower apartment values today, says Dan Fasulo, managing director of New York City-based market research firm Real Capital Analytics. Take the GSEs out of the market and multifamily cap rates would shoot up “at least 100 basis points, probably more” across the board, he says.
Still, the question remains whether apartment values reflect what’s truly happening in the market, since the government is providing the GSEs with low-cost capital. “Cap rates probably won’t find their true level because I don’t think the GSEs have any intention of pulling back in the near future,” Fasulo says. “There would be a tremendous lack of liquidity in the multifamily market if those two did not exist, especially in the more secondary and tertiary markets.”
The only players in the multifamily industry that might be frustrated by the government support of the GSEs are other lenders who can’t compete for apartment deals. Take Buchanan Street Partners, an equity provider that also offers a senior mortgage program to commercial real estate borrowers. The debt it offers for office, retail, and industrial properties is priced significantly higher than what the agencies are offering apartment borrowers.
“Inherently, our program is not competitive for apartment owners,” said Eric Snyder, a senior vice president with Buchanan Street Partners, at the Apartment Finance Today Conference. “When the pricing you pay for debt is more expensive for some areas, and not multifamily, that has to have an impact on multifamily cap rates.”
In a sense, the GSEs are the multifamily industry’s stimulus plan—since housing is a basic human need, it’s the one area of commercial real estate the government protects. The office, retail, and industrial sectors should be helped by the term asset-backed securities loan facility (TALF), which seeks to make debt more available through government purchase of securities backed by commercial real estate.
“The availability of their capital is making multifamily less risky than other asset classes, but it’s hard to quantify the impact on value,” says David Cardwell, vice president of capital markets for the National Multi Housing Council. “The idea that the government is bailing out the industry by providing artificially low capital and propping up the GSEs—one could argue there’s truth to that. But the alternative would create greater havoc and chaos and reduce market confidence, and that wouldn’t help anybody.”