While credit availability for multifamily borrowers is still constrained, there have been some recent glimmers of hope that the capital markets are starting to stabilize.
Lender spreads are coming down for the first time in years; the pricing gap between buyers and sellers is slowly closing; and underwriting standards are beginning to stabilize. Taken together, these measures indicate that the bottom of the market may not be far off.
Interest rates on standard 10-year deals have been improving the past few months. Loans done through Fannie Mae’s mortgage-backed securities platform are pricing in the mid-5 percent range, thanks to renewed investor interest in the securities. And Freddie Mac recently lowered pricing on its Capital Markets Execution (CME) program to bring it more in line with Fannie Mae’s. What's more, lender spreads on standard 10-year agency loans have fallen from a high of around 380 basis points (bps) to the mid-200 bps range today. Today’s all-in rates in the mid- to high-5 percent range are a contrast to just three or four months ago when the GSEs were pricing out in the low to mid- 6 percent range.
“If you look at the trend line over the past six months or so, there’s no question that spreads have contracted from their highs, and that is a very positive thing for our industry,” says John Cannon, executive vice president and head of agency lending at Horsham, Pa.-based Capmark Finance. “For two years, we were in an ever-increasing-spread environment, so having six months’ worth of spread contraction has definitely helped.”
And while transaction activity has ground to a halt, there is some indication that the pricing gap between buyers and sellers is starting to close. Sellers are beginning to bite the bullet and accept higher cap rates as the level of distressed assets continue to pile up. “It looks to me like buyers and sellers are becoming more aligned,” says Mike May, senior vice president of multifamily for McLean, Va.-based Freddie Mac. “Some of the cap rates we’ve seen on recent property sales have been more in line with where we think cap rates are. It’s not a blistering pace, but over the last month or so, I’ve seen some acquisition deals that kind of surprised me.”
Another encouraging sign emerged in a recent Federal Reserve Senior Loan Officer survey. The survey found that most banks did not tighten credit standards in April—the first time in more than a year that the majority of banks kept their underwriting standards unchanged. About 60 percent of the nation’s 53 largest banks kept their existing credit standards last month, while 39 percent of the banks tightened up.
And borrowers are generally reporting better liquidity availability. The National Multi Housing Council measures access to debt and equity through a quarterly survey of borrowers, and its most recent survey offered some hope: Nearly half of all borrowers surveyed in April said that equity financing conditions were unchanged from the previous quarter, the highest response in seven quarters. And more than half said that availability of debt was unchanged in April, with 14 percent saying that last month was a better time to borrow than January.
The recent “stress tests” on the nation’s 19 largest banks also offered a slight case for optimism. The results were better than many investors had expected: While 10 of the 19 banks needed to raise more capital, institutions such as JPMorgan, Goldman Sachs, and American Express were deemed adequately capitalized to ride through the storm. The tests found that in a worst-case scenario, those 19 banks would lose about $53 billion in commercial real estate loans in 2009 and 2010 combined. But losses on residential loans could number $185.5 billion, while bad consumer loans and credit card loans could cost those banks about $83 billion each in that time-span. In other words, commercial real estate is not the loss leader.
So, while the apartment market will continue its bumpy ride through the remainder of the year, there are indications that the bottom is close. And in today’s economy, a slowdown in bad news is akin to good news indeed.