Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development have provided stability for multifamily investors and owners during the COVID-19 pandemic and the economic downturn.
“The key takeaway on the debt side of the equation is how efficiently the capital markets operated during the pandemic and its accompanying recession. Owners and investors experienced little or no change to capital access, and pricing was attractive,” says James Flynn, CEO of Lument, the combined organization of Hunt Real Estate Capital, Lancaster Pollard, and Red Capital Group and a brand of ORIX Real Estate Capital Holdings. “For this, we can largely thank Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA), which fulfilled their mission to provide liquidity in times of economic crisis.”
Despite total multifamily lending volume falling more than 20% through September year over year, the government-sponsored enterprise (GSE) market share increased as they stepped up to fill the gap when bank and life company lenders grew more cautious, Flynn says.
“The stable function of markets also was abetted by the quick decision by the agencies to extend forbearance to borrowers impacted by the pandemic,” he adds. “Absent this decision, the level of distress, and therefore spreads, would likely be higher.”
Flynn also expects that with the recent announcements from the Federal Housing Finance Agency related to GSE volume cap and capital framework, there will be ample opportunity for both agency and non-agency business in 2021.
Steve Rosenberg, founder and CEO of Greystone, says HUD and the GSEs also have aided multifamily refinance, which has been a very active sector this year, primarily because of sustained low interest rates.
“Some capital sources in the industry pulled back, but government-backed financing, such as Fannie Mae, Freddie Mac, and HUD, remained a stable source of qualified sponsors,” he says, adding that Greystone saw a 120% increase in HUD loan firm commitments this year and expects continued interest in this non-recourse, low-rate, and long-term permanent financing option.
Investor Opportunities
While the pandemic has brought a lot of uncertainty to the nation, Pat Jackson, CEO and founder of Sabal Capital Partners, reminds that the downturn caused by COVID-19 is different than the Great Recession.
“When I started in 2009, it was the worst of times,” says Jackson. “Part of it was there were a lot of people paralyzed by indecision because they didn’t know what to do. We’ve always felt that we’re forward looking when everyone else is sitting on their thumbs. Investors need to take a longer view. Those who get paralyzed will slow down.”
He adds one of the advantages this time around is that many people active as investors and in the business were here in 2009. “It hasn’t been that long. They know instead of the sky is falling that it’s a great opportunity,” he says. “That will help the market keep from locking down.”
Jackson also says that an increasing 10-year yield, the promise of a COVID-19 vaccine, and a smooth presidential transition will provide hope for people. “All of those things are important to get people to continue looking for opportunities to invest and stay active in investing.”
While multifamily sales volume started this year on par with previous years, volume declined to levels not seen in a decade as the pandemic intensified, according to Flynn. “Private equity, REITS, and institutional investors were hampered by travel limitations and weak performance in the urban mid- and high-rise building segments in the gateway markets that they prefer.”
However, he says local buyers are becoming more active and focusing on Class B suburban garden-style communities and workforce housing properties. “With interest rates still at historical lows, we expect a flurry of deals before year-end. Pent-up demand, a degree of cap rate decompression, and a sense of urgency to take advantage of the current rate environment will drive volume higher.”
Overall, the impact of the pandemic on the multifamily lending environment has been limited, says Flynn. “Although acquisition volume has fallen, the rate environment is such that refinance activity is, in part, mitigating the loss.”
Rosenberg adds that endless opportunities abound for multifamily borrowers right now. “We take pride in helping them find a creative solution to reaching their goals, whether it’s transitional financing, a whole portfolio retool, extracting equity, selling, or securing a long-term permanent loan,” he says. “We get excited by taking a holistic look at a portfolio and helping an investor expand and grow, and having the means to help them do that. Multifamily real estate remains a solid investment for the long term.”
Tighter Underwriting
Lenders are looking more closely at loan underwriting during the pandemic, primarily due property cash flows and rent collections.
“For underwriting, we’re looking at clients’ projections more carefully when considering the ability to fill a property at higher rents and the speeds with which that can happen,” says Rosenberg.
Flynn adds that Lument has made small adjustments to underwriting standards on its risk-exposed book of business to reflect this higher-risk environment.
“On the property market side, these risks are translating into a wider than usual gap between buyer and seller price expectations, particularly in high-cost gateway metros, where the pandemic has affected property performance,” he says. “Buyers are uncertain about valuing properties, and owners are hesitant to sell in these conditions unless they have to. This is another reason that REIT, private equity, and institutional investor acquisition volume declined.”
Attractive Deals
While investment sales volume is down in all market segments this year, transactions in the urban mid- and high-rise arena has had the largest percentage decline, according to Flynn. However, activity in Class C and Class B suburban garden sales also saw a decline, but per-unit prices increased about 2%. “We expect this trend in suburban markets to continue, but a COVID vaccine and overall health conditions (improvement or deterioration) will have an impact on this trend,” he says.
For Rosenberg, mission-driven multifamily investing—affordable and workforce housing in the middle market—is an area that Fannie Mae and Freddie Mac are committed to creating and preserving. “It’s really a win-win for everyone involved, especially the tenants,” he says. “Greystone has been very active in affordable housing for many years, working on innovative structures to develop and maintain this critical housing. We need it more than ever.”
Jackson agrees. “In the space of affordable housing and workforce housing, specifically, we think there’s a big demand relative to supply,” he says. “It will stay a high occupancy rent class. When we look at our book of business, largely Fannie Mae and Freddie Mac, the delinquencies that we are seeing are really low. We haven’t seen a dramatic impact on occupancy and economic occupancy, and workforce housing renters have kept their jobs. In terms of that space, we think it’s going to continue to perform relatively well.”
Looking Ahead
The lenders agree that the advancement of a COVID-19 vaccine and another stimulus package to help Americans impacted by the pandemic will have major roles on the state of the market in 2021.
“Like everyone, I worry how long the pandemic will impact the world and what the long-term after-effects may be. It is permeating every aspect of life, and the longer it persists, the longer the recovery will be,” says Rosenberg. “There needs to be relief for renters, and we hope Congress can help in this respect.”
Flynn says, from a cost of capital perspective, borrowers could not ask for a more conducive environment, albeit with slightly tighter underwriting.
“Borrowing costs remain near historic lows, and the Federal Reserve has indicated that it expects to maintain a very accommodative monetary stance at least through 2022,” says Flynn. “As they demonstrated again this year, the GSEs are prepared to support the availability of credit to the industry through thick and thin.”
He adds that while the market for urban Class A product is in transition, the intermediate outlook still remains bright. “By the same token, a new set of development opportunities is being created as millennials continue to establish families in greater numbers and thus seek more family-friendly space,” Flynn says. “Investors that satisfy these priorities while still offering the lifestyle amenities this generation is accustomed to will find success. This generation really accelerated the renter-by-choice model versus the historic needs-based rental market. Overall that trend appears here to stay, which is a clear opportunity for multifamily.”
