The Federal Reserve’s interest rate cut in September is creating glimmers of hope for the commercial real estate (CRE) and multifamily markets, according to Berkadia’s latest Quarterly Market Report released this month.
“The Federal Open Market Committee has cut interest rates by 50 basis points, the first in over four years, citing cooling inflation and a weakening labor market. Despite a stronger-than-expected September nonfarm payrolls report, Fed chair [Jerome] Powell expressed confidence in maintaining labor market strength without inflationary pressure. The market anticipates further rate cuts in November and December,” said Ernie Katai, executive vice president and head of production at Berkadia. “Fannie Mae and Freddie Mac have increased their market share of CRE originations, with a recent surge in application activity poised to boost government-sponsored enterprise (GSE) volumes past 2023 levels.”
According to the report, Fannie Mae issuance is down 23% from September 2023, with year-to-date figures totaling over $32.5 billion. With an annualized run rate of $43 billion, this could leave the GSE $10 billion shy of last year’s production total and $27 billion shy from the $70 billion multifamily cap. For Freddie Mac, it is running at a slightly better pace than 2023, up 2% through the first half of this year. Despite the slight improvement, it also is expected to finish short of last year’s production total of $49 billion and the $70 billion cap. However, Berkadia noted that a surge in application activity over the past two months has poised the GSE volumes to surpass 2023’s totals.
While the typical acquisition ratio was around 40% on GSE originations pre-pandemic, it hit near-term low in 2022 as buyers and sellers paused and dipped again last year due to an increase in Treasury rates. That trend has seen a positive reversal, according to Berkadia, with an increase in transaction activity.
“Fannie Mae and Freddie Mac are both aggressively pricing deals for current year delivery, and rates are sticking to a relatively tight trading range,” stated the report. “One of the key features of the Fannie Mae and Freddie Mac programs are the speed with which they can move from application to a locked rate, with their streamlined rate lock or index lock programs.”
Other key findings from the Berkadia report include:
- Multifamily transaction volume in 2023 and year to date have been dominated by core and core-plus product completed after 2017 due to their potential to generate stable and predictable cash flows. In addition, sellers are motivated to dispose of these newer assets in the current environment because of the need to consider exit strategies, loan maturities, or broader business goals;
- While transaction volume has been substantially down, deals are still occurring. Private and institutional investors have dominated acquisitions through the second quarter. “The biggest buyers were a mix of fund shops, syndicators, separate account managers, private investors, a foreign pension fund, and a public REIT,” noted the report. “Some public REITs are partnering with foreign capital and seeing platforms with existing assets in exchange for a commitment of capital to pursue new opportunities. These groups have substantial dry powder and access to competitive financing options, enabling them to pursue large-scale deals”;
- The top buyers in multifamily transactions this year through the second quarter have been FPA Multifamily, Kairoi Residential, and Blackstone, while the top sellers are CIM Group, Heitman, and AvalonBay; and
- 80% of all multifamily transactions over $50 million since 2022 have occurred in 25 markets, with Austin, Texas; Dallas; Atlanta; Phoenix; and Miami seeing the most activity. These markets are offering strong job and population growth and a favorable economy. New York City topped the list for 2024 through the second quarter with $2.3 billion in volume. Phoenix, Dallas, and the Los Angeles and Washington, D.C., metros round out the top five.