Over the past decade, Atlanta-based Wood Partners has built about 3,500 apartment and condo units per year, according to company managing partner Jerry Durkin. In 2009, the company closed on a single development deal—in December. “Lack of debt and equity is crippling the private companies’ ability to start new development,” Durkin told attendees at the International Builders’ Show in Las Vegas this week.
Durkin joined NAHB chief economist David Crowe and Gardena, Calif.-based MacFarlane Costa Housing Partners president and CEO Michael Costa on an economic forecasting panel at IBS that gravely predicted a critical supply shortage in multifamily housing if the credit crisis currently gripping the industry continues.
“We desperately need lenders to begin financing apartment communities again,” Crowe said. “The vacancy rate for apartments is elevated now, but as the economy recovers and jobs return, the people who’ve been doubling up with relatives and friends will want a place of their own, and there may not be one available.”
Even as the multifamily industry lauded Freddie Mac, Fannie Mae, and the Federal Housing Administration for their continued role in providing liquidity to the debt markets, apartment developers still lament the stricter underwriting—including greater equity requirements and personal guarantees—as well as a lack of gap financing in the marketplace to make projects pencil out.
“The credit parameters have certainly tightened,” admitted Patti Saylor, vice president of multifamily offerings and customer management for Freddie Mac, who sat on a Capital Markets panel with Baltimore, Md.-based AGM Financial Services CEO Margaret Allen; Mishawaha, Ind.-based The Sterling Group COO Lance Swank; New York City-based The Milestone Group Managing Partner Jeffrey Goldberg.
“It is still unclear how far poorly performing properties will deteriorate in terms of revenue and vacancy,” Saylor said. “So it becomes a challenge to produce loans with proceeds that can get people out of their existing debt. We are therefore putting more emphasis on the micro-markets you are in: the street-level aspects that will make a property a success or prevent its success.”
Still, the inability for developers to locate mezzanine lenders to provide gap financing—particularly for larger refinancing and development projects—are making agency efforts to keep markets liquid a moot point. Goldberg notes that his firm has been using discretionary funds to provide such “rescue capital,” but only in environments where long-term property prospects look solid. “The Band-Aid approach is a risky one, but the prospects for continuing with kicking the can down the street are diminishing. The last thing a special servicer wants to do is revisit a bad loan in another six months.”
Freddie Mac, as well, might begin to assist multifamily borrowers with additional gap financing options. Under a plan outlined by Saylor but not yet approved by the GSE, Freddie Mac may begin to approve certain mezzanine lenders for gap financing on multifamily loans. “People still need to come to the table with cash to refinance mortgages, though,” Saylor said. “We are proposing a program to partner up with some mezzanine debt providers to fill the gap, but that will only work on properties that show a hope for the future. That is the most positive thing we have going right now.”
According to NAHB figures released this week, industry figures expect apartment demand to overcome market supply within 16 months, producing increasing shortages of rental housing through 2014. For multifamily asset managers not involved in construction, those figures will likely be seen as good news. NAHB expects supply constraints to result in an increase to market-rate rents by as much as 10 percent per year in 2011 and 2012, and by 4 percent to 7 percent per year until 2015.
