As housing demand continues to surge across the nation, finance leaders are predicting that capital will continue to flow for both affordable and market-rate multifamily deals in 2020.
“There is a lot of capital in the multifamily lending space for both market-rate and affordable financing,” says Rich Martinez, senior vice president of multi-family production and sales at Freddie Mac. “We expect the markets to be as strong and robust as they have been in the past several years.”
Hal Collett, managing director of Federal Housing Administration and affordable lending at PGIM Real Estate Finance, agrees. “The interest rate environment has been incredible. It has played a large role in keeping us at a level to continue to spur business in a large way,” he says. “All indications are that we will continue to have a strong environment.”
The Mortgage Bankers Association forecasts record commercial and multifamily mortgage originations and multifamily lending for 2020.
“The low-interest-rate environment, coupled with continuously strong demand for commercial and multifamily assets, has pushed property values higher and increased demand for mortgages,” says Jamie Woodwell, MBA’s vice president for commercial real estate research. “At the beginning of [2019], many economists, investors, and others anticipated long-term rates would be around 3% and rising—potentially putting pressure on property values and decreasing demand for debt. Instead, the 10-year Treasury yield is at approximately 1.5%, and many market participants are planning for rates to remain ‘lower for longer.’ The result is heightened demand and higher volumes.”
In addition to low interest rates fueling demand for multifamily housing, Martinez points to positive rent growth of over 4% and vacancy rates that have been moderating but not increasing. “Demand continues to exceed the supply of multifamily housing, and as a result we do not see any signs of weakness of the overall markets.”
Tim Leon, executive vice president at Citizens Bank, says he is optimistic as he looks to the future. “From an economic perspective, we think things look pretty good as we look forward. The continued low-interest-rate environment is great for real estate, employment numbers continue to be solid, and equity markets are performing well,” he says. “We expect the multifamily market will continue to be very active with robust activity in urban gateways and strong secondary markets.”
Watch List
While fundamentals remain strong, affordable and multifamily housing stakeholders still need to keep their eye toward a potential recession as well as other macro trends, including trade wars, impeachment, and the presidential election.
“To counterbalance the continued positive variables, we do need to also recognize that there will be an economic slowdown on the horizon, since we have had such a long period of economic expansion,” Leon says.
Shahin Yazdi, a principal and managing director at George Smith Partners, agrees that the industry should get ready for a recession. “The best way to prepare for that, regardless of the asset type, is to lock down the lowest rates on your loans. If you’re a long-term holder, securing long-term rates is very beneficial.”
Collett adds that the government-sponsored enterprises (GSEs) have done a good job of early rate-lock options as well as affordable forward-commitment products.
Paul Weissman, senior managing director and head of originations for affordable housing finance at Hunt Real Estate Capital, says while there is a need to plan, he generally agrees with those suggesting multifamily housing is unlikely to be significantly impacted by a future recession, especially within the affordable housing sector. “The need for affordable housing at the 60% of the area median income level and below remains fairly acute, and the amount of production that we’re seeing annually is not even close to meeting the need for housing,” he says. “And I think that’s true for housing at 100% to 125% of the AMI and even higher in some certain major metros.”
Weissman adds that he thinks the risk to the multifamily sector is limited to high-end luxury apartment buildings that are under construction.
“The massive need for workforce and affordable housing must be at the forefront of what we’re doing on the lending side,” Collett adds.
With the nation’s affordability crisis, the industry also will see more micro-units as well as an increase in co-living projects in the year ahead, Yazdi predicts.
Another trend being watched is statewide rent control, which was passed in California, New York, and Oregon in 2019. Martinez says Freddie Mac is keeping an eye on the regulations to see what impact they might have on its book of business.
Plans for Fannie Mae and Freddie Mac to exit conservatorship also is top of mind heading into 2020. The Federal Housing Finance Agency revised its multifamily loan caps in September, increasing the new caps to $100 billion for each GSE, a combined total of $200 billion in support to the multifamily market, for the five-quarter period between the fourth quarter of 2019 and the fourth quarter of 2020. The FHFA is directing that at least 37.5% of the GSEs’ multifamily business be “mission-driven affordable housing.”
In addition, the administration released wide-ranging proposals for housing finance reform in early September.
“We are going to continue providing affordability, stability, and liquidity to the market, but we are also focused on a new challenge set by our regulator—on preparing to exit conservatorship,” says Martinez, adding that Freddie Mac doesn’t plan to introduce any new products but will focus on becoming more efficient and effective in delivering the current ones. “We will continue to tweak the programs that we have and make the processes better and quicker for our seller-servicers and our borrowers. We plan to provide a consistent presence in the market, and we think 2020 will be an excellent year overall for the market.”
Also on the watch list is the potential for private-activity bond volume cap to be tapped out in several states, including California. “There’s a real potential for California using a portion of its bond cap for non-housing activities, which could be a meaningful change,” Weissman says. “Virtually all the bond volume cap in recent years has gone to affordable housing. Some deals might struggle to get bond volume in 2020.”
Weissman adds he is also seeing more and more alternative sources of capital come into the affordable sector and multifamily sector, to some degree. “There are more private label bond placement programs, more debt fund groups that are providing financing for multifamily. We’ll be paying attention to how much penetration those alternative funding sources get in the multifamily financing sector.”
