With the high demand for affordable and workforce housing across the nation, lenders’ volumes were robust in 2019, with anticipated continued growth in the year ahead. According to a survey by sister publication Affordable Housing Finance, the AHF Top 25 affordable housing lenders provided over $41 billion in permanent and construction loans to developments that serve up to 80% of the area median income in 2019. This is up from the AHF Top 25 lenders’ $35.2 billion in 2018 and $30.5 billion in 2017.
Citi Community Capital remains at the top of our lender list, having lent almost $6.1 billion to affordable properties in 2019. That is down from the almost $7 billion in 2018.
“2019 was a surprisingly strong year. We went into 2019 thinking that interest rates would rise and that it would be more difficult for some projects to pencil,” says Richard Gerwitz, co-head of Citi Community Capital. “But not only was that not the case, but as the year went on, it became increasingly apparent that private-activity bond allocation was going to run out in a few more states, driving some developers to advance their projects. As a result, the last months of the year were even busier than they usually are.”
Wells Fargo remained No. 2, lending $4.7 billion in 2019, followed by Stifel, Nicolaus & Co. with almost $4.2 billion. Stifel attributed its $2.5 billion year-over-year increase to an expansion of the firm’s affordable housing team and a significant increase in the number of 4% low-income housing tax credit (LIHTC) and bond issues.
“We saw affordable housing bond issue volume at considerably higher levels last year. We are seeing pressure on state volume cap that we haven’t seen before,” says Stifel managing director John Rucker.
Rounding out the Top 5 affordable housing lenders are Bank of America and KeyBank Real Estate Capital.
The mergers of some financial institutions also made recent headlines. In January 2020, Hunt Real Estate Capital combined with Red Capital Group and Lancaster Pollard, the two brands that make up ORIX Real Estate Capital. The three firms will be merged into a unified provider of commercial real estate capital over the course of 2020. In December, SunTrust and BB&T completed its megamerger to form Truist Financial Corp.
In addition, Greystone announced the acquisition of America First Capital Associates Limited Partnership Two, the general partner of America First Multifamily Investors (Nasdaq: ATAX). “The ATAX team’s expertise in direct unrated tax-exempt bonds, as well as other alternative capital products, combined with Greystone’s deep expertise and capabilities in affordable housing finance presents a compelling opportunity to offer more choices to the affordable market,” says Jeff Englund, senior managing director of multifamily affordable housing at Greystone.
The strong demand for affordable and workforce housing products isn’t expected to slow anytime soon, and many lenders are forecasting growth for the future.
“There is an affordable housing crisis in America, and there are endless opportunities across the U.S. to develop or preserve affordable housing,” says Mathew Wambua, Merchants Capital vice chairman.
Philip Melton, executive vice president and national director of affordable and Federal Housing Administration (FHA) lending at Bellwether Enterprise, says he sees continued growth across all asset classes. “We believe the market will continue to be robust for multifamily development and preservation, driven in large part due to continued lower interest rates,” he says. “When coupled with the increasing flow of Year 15 LIHTC transactions and the focus of Fannie Mae, Freddie Mac, FHA, and the U.S. Department of Agriculture in the affordable space, there will be sufficient liquidity in the market for affordable and workforce housing communities.”
Al Beaumariage, senior vice president and affordable housing program manager at KeyBank, says he also expects continued growth and increasing competition for acquisitions within the multifamily affordable housing sector in the year ahead. “Year 15 acquisitions and resyndications will remain popular, but acquisitions of Year 15 properties that are rolling into their extended-use periods will also remain popular,” he says.
Many lenders also are watching the bond market closely.
“I believe that bond deals will continue to be a driving force behind lending volume in our industry,” says U.S. Bank senior vice president Dan Smith. “With rates down and equity pricing relatively stable, more and more volume cap is being requested in states throughout the country. This should lead to a lot of activity in the 4% market throughout the year.”
Gerwitz anticipates more taxable debt in 2020 as states either limit the amount of private-activity bond allocation they provide to any one project to stretch their allocation or limit allocation to preservation altogether. “Using higher-cost taxable debt will reduce proceeds to some extent and increase the need for other sources of capital,” he adds.
Helen Hough Feinberg, managing director at RBC Capital Markets, adds: “We have also seen some policies, which while well-intentioned, in actuality have rendered many 4% bond deals financially unfeasible.”
Lenders also expect government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac to continue to provide capital, both debt and equity, to affordable and regulated workforce housing in the year ahead, as conservator Federal Housing Finance Agency (FHFA) directs at least 37.5% of their business be mission-driven, affordable housing.
“In 2020, we anticipate continued support by the GSEs for affordable housing product through competitive pricing and loan structures,” says Greystone’s Englund. “The GSEs will likely see continued growth in this sector along with expanding their focus to workforce housing product.”
However, there is some concern around the impact of the new strategic plan for the conservatorship of Fannie Mae and Freddie Mac, with loan purchase caps set at $100 billion for each GSE from the fourth quarter of 2019 through the fourth quarter of 2020.
“As we approach an election year, it is uncertain how the new volume caps and strategic plan for the GSEs will impact the multifamily lending market and product availability,” adds Englund. “With the volume that both agencies are seeing, what happens if they begin to approach their caps ahead of the end of the year?”
Bellwether’s Melton also says he expects to see more liquidity in the market for multifamily developments as the agencies are maxed out per the FHFA guidelines, “potentially leading to more sources of financing getting aggressive in trying to capture market share.”
Most lenders agree that the most popular executions in the coming year will continue to be products offered by the GSEs, including Freddie Mac’s Tax-Exempt Loan (TEL) program and Fannie Mae’s MBS Tax-Exempt Bond (MTEB) structure, and from the FHA.
“We believe that the FHA program will continue to be popular as it offers the greatest amount of leverage for tax credit transactions, and the Department of Housing and Urban Development is working to improve processing time frames,” says Tracy Peters, senior managing director of affordable housing at Red Capital Group.
Sarah Garland, director of affordable housing debt and structured finance at CBRE Affordable Housing, adds that new players continue to come into the debt markets to provide both bridge lending and private-placement products. “We will also see small-balance loans as an opportunity for growth,” she notes.
Cody Langeness, president of Red Stone Tax Exempt Funding, also says the private-placement debt structure is becoming an increasingly attractive execution for 2020. “As deal volume increases, both developers and lenders seem to be very busy and operating at max capacity,” he says. “With this in mind, ease of execution, a streamlined underwriting process, and certainty of closing seems to be at the top of most borrowers’ wish lists.”
Peters adds that he believes maximizing leverage will continue to be a focus for deals. “The continued demand for affordable housing and the increasing complexity of financing transactions will push lenders to develop more flexible debt structures,” he notes.
Top 25 Lenders of 2019
|Company||2019 (in millions)||2018 (in millions)|
|1. Citi Community Capital||$6,091.6||$6,994.0|
|2. Wells Fargo||$4,749.2||$5,279.4|
|3. Stifel, Nicolaus & Co.||$4,163.0||$1,557.0|
|4. Bank of America||$2,987.0||$2,796.0|
|5. KeyBank Real Estate Capital||$2,656.3||$2,459.0|
|6. JPMorgan Chase||$2,425.0||$1,417.5|
|7. Jones Lang LaSalle Multifamily||$1,925.9||$1,228.4|
|8. Capital One||$1,366.0||$1,309.0|
|9. Walker & Dunlop||$1,344.0||$1,029.0|
|12. Deutsche Bank Securities||$1,103.2||$1,344.5|
|14. Merchants Capital Corp.||$1,060.8||$1,096.9|
|15. Bellwether Enterprise||$935.0||$919.8|
|16. U.S. Bank||$905.0||$798.0|
|17. Hunt Real Estate Capital||$811.9||$566.2|
|18. PGIM Real Estate Finance||$787.0||$713.2|
|19. Red Stone Tax Exempt Funding||$768.0||$617.2|
|20. Red Capital Group||$738.6||$624.8|
|21. TD Bank||$685.0||$694.0|
|23. RBC Capital Markets||$678.8||$612.5|
|24. PNC Real Estate||$646.1||$663.4|
|25. R4 Capital||$495.8||$683.5|
Source: 2019 Lenders Survey, January 2020. Totals include permanent and construction loans for properties at incomes up to 80% of the area median income.
Note: The Top 25 rankings reflect only those companies that provided Affordable Housing Finance with figures. If you'd like to be considered for next year's rankings, please contact Christine Serlin at [email protected].
While lenders remain positive about the year ahead, many point to uncertainty as the biggest threat to the debt markets.
“Any condition or event causing uncertainty in the capital markets can disrupt the multifamily lending markets,” says KeyBank’s Beaumariage. “In the current environment, trade agreements with China and disruption in the Middle East appear to have the greatest likelihood of negatively influencing the lending markets. It’s also an election year, which in and of itself can cause market uncertainty.”
Gerwitz adds that the financial infrastructure that supports the affordable housing market is unlikely to falter unless there is a significant shock to the overall domestic or worldwide economy. “Our great threat tends to be increased interest rates, which reduce the amount of proceeds available for project development and preservation in an environment where cobbling together the capital structure for every transaction is already difficult.”
Alice Carr, head of community development banking at JPMorgan Chase, echoes the uncertainty factor. “One of the biggest challenges to the affordable housing lending market is the uncertainty around government policies, such as Community Reinvestment Act reform, trade policy influences on construction costs, and how rent control policy will play out.”
Others are also closely watching rising land and construction costs.
“Material increases in the costs of land and construction in all markets in desperate need of affordable housing will reduce the overall amount of new construction transactions that are viable,” adds Tim Leonhard, managing director of affordable housing at JLL Multifamily.
U.S. Bank’s Smith adds that the threats he sees are those associated with a hot market: construction and acquisition costs. “On new deals, construction costs are key as subs are difficult to find. Deals under construction have overruns and delays. The risk seems to have subsided a bit in most markets but remains the top concern in the near term. On acq/rehab deals, acquisition costs continue to creep up, and this is stressing budget. Cap rates have been at historic lows for years but continue to creep down in many markets.”
But regardless of what is to come down the road in 2020, relationships and long-term partnerships will be critical for TD Bank. “As a lesson from the massive shifts in the capital markets that occurred abruptly during the last downturn, having a long-term partner matters, especially if something goes wrong,” says Gregg Gerken, the bank’s head of commercial real estate. “Capital continues to flow very aggressively toward real estate, and borrowers can be enticed by ‘teaser’ offers that are aimed at winning new business.”