In an effort to compete more effectively with the conduit market and to grow its lending portfolio to include smaller, riskier deals, Freddie Mac has reorganized its multifamily division.
“We're moving away from a structure similar to the life insurance model, where one producer does everything—processing, selling, underwriting, and product development,” says Mike May, senior vice president of multifamily sourcing for McLean, Va.-based Freddie Mac. “We need a business model that will allow us to expand into riskier assets and also allow us to offer portfolio execution.”
The division has been split into several different groups including production, underwriting, and processing. Additionally, two groups have been created: the offerings and customer management department, which addresses customer business needs; and the terms of business management department, which is responsible for transaction-level credit and servicing policy, credit support for new product development, and customer compliance management.
“My impression is that Freddie Mac found that it was not doing as much business as it felt it should be doing,” says Lawrence Stephenson, executive vice president and director of capital markets for NorthMarq Capital, one of Freddie Mac's correspondent lenders. “So, Freddie Mac is trying to take a lesson from its competitors and is following a very proven business practice that the conduits use.”
May acknowledges that Freddie Mac has previously focused on bigger, higher quality assets, but he notes that the organization needs to expand its market share. To do that, he says, it must go where the market is heading. “We plan to start expanding in the small loans space—less than $5 million—and also expand our credit box and push the loan-to-value,” he explains.
May notes that Freddie Mac currently keeps most, if not all, of its loans on its balance sheet, but it plans to do more securitizations in the future. “We did one securitization last year to start to learn the process, and we're going to continue to build that capability and then start moving in that direction,” he says, adding that the organization will substantially enter the commercial-mortgage-backed securities market, or CMBS, in 2008.
“Freddie Mac has a very large appetite for multifamily investment, but there's only so much that can come through the traditional funnel of the Program Plus,” points out John Cannon, executive vice president with Horsham, Pa.-based Capmark Financial Group. “To satisfy that appetite, Freddie has to go the route of CMBS.”
As part of the reorganization, Mitchell Kiffe will lead the production and sales group, which will be responsible for deal negotiation, price quotes, and commitments. Freddie Mac's managing regional directors will remain the lead contacts for customers in the negotiation and execution of deals, and a team of regional underwriting and home office sales and underwriting staff will support them.
Kim Griffith will head up the affordable sales and investments groups, which handles deal negotiation, price quotes and commitments for affordable business. This group will also be supported by regional underwriting and home office sales.
Mike McRoberts will be in charge of Freddie Mac's new multifamily underwriting department, which is responsible for credit decisions. The underwriting department is teaming with the sales functions to make transactions fast and seamless.
Daryl Hall will continue as head of asset management, supporting Freddie Mac's increased focus on new and specialty products while finding new ways to streamline portfolio servicing operations.
“Our hope is that Freddie Mac's reorganization will be a benefit to the industry,” says David Cardwell, vice president of finance and technology for the National Multi Housing Council. “They're trying to improve their execution. If they can do it, it's a good thing.”
Green Capital Washington, D.C., is the first major city to pass legislation requiring private development projects to meet green building standards. The law, which goes into effect in 2012, will apply to residential projects over 10,000 square feet where 15 percent of the project's cost is provided through public financing, and to all non-residential buildings over 50,000 square feet. —R.Z.A.
Go Nets The mega Atlantic Yards project, which will include a new basketball arena for the New Jersey Nets, got the green light. A New York state panel gave final approval to the $4 billion plan to redevelop 22 acres in downtown Brooklyn. The project, developed by Forest City Ratner Cos., is expected to take 10 years to complete and will include more than 6,400 units of affordable, middle-income, and market-rate housing. —R.Z.A.
Lost in Translation New HUD regulations require apartment owners who receive any federal assistance, including from the Section 8 program, to translate a broad range of vital documents in multiple languages. Documents include resident applications, leases, property rules and regulations, and termination/eviction notices. HUD also requires verbal translations into English for non-English speakers who can only read in their native language. —R.Z.A.
Rec Rooms Short on space in your Washington, D.C., high-rise projects? Help is on the way. The D.C. Zoning Commission is expected to approve an amendment that will exempt residential developers from including mandatory fitness centers in buildings in commercially zoned areas. Currently, developers are required to turn 5 percent to 20 percent of the residential space into a recreational area. —R.Z.A.
Goal! San Francisco developer Victor MacFarlane of MacFarlane Partners is one of the new owners of the D.C. United major league soccer team. The minority-led ownership group, D.C. United Holdings, paid $33 million in cash for the team. Other owners include William Chang, chairman of the global investment firm Westlake International Group, and Brian K. Davis and Christian Laettner, co-managing members of Blue Devil Partners, a real estate development firm in Durham, N.C. “Our growing Washington, D.C., business presence and the fact that my partners are friends and business associates made the acquisition decision easy,” says MacFarlane. —R.Z.A.
Condos by Choice Nearly half of all condo buyers choose their homes without considering any other type of housing, according to a new survey by NAHB that examines the preferences of condo buyers. Lifestyle and affordability are the top factors driving condo sales. Industry experts expect the condo market to stabilize at 30 percent of the approximately 350,000 multifamily units built annually. —R.Z.A.
Executive Feedback Q & A How is the housing market slowdownQ& affecting your A business?
A: “Frankly, not as much as we had expected. Our rental-apartment occupancy has stayed the same. And while we are told that labor and materials would be readily available and reasonably priced, I am not sure that we have felt the benefit yet.”—Alan Hammer, director, Westminster Management
A: “The slowdown in the single-family and condo business has slowed down the rampant construction cost escalation over the past two years. The number of speculators has been reduced so that the residential for-sale business will return to a normal state in 2007. Financing also is returning to normal underwriting.”—Rick Cavenaugh, president, Fifield Cos.
A: “Business fundamentals are still the same for us. Our goal is still to deliver great property in a great location. This is obviously the best time for people to buy, and we are competing for those buyers as earnestly as possible.”— Michael Lerner, principal, MCZ/Centrum Developers
Chicago Bound
Pinnacle expands its presence in the windy city.
Pinnacle, a Seattle-based property management firm, has opened a new Illinois office to help with its expansion efforts in the Chicago market. The company has been active in the market for many years, but now plans to dramatically grow its management portfolio from 2,000 units to more than 10,000 units.
“Like a lot of markets, Chicago was soft for a couple of years, but the market is now gaining a lot of momentum and becoming very robust,” says Rick Graf, central region president of Pinnacle, an American Management Services C o. “ We see a huge demand in the market for a national company such as ours that brings a national infrastructure with local expertise.”
The company hired Nick Helmer Jr., formerly of The Inland Real Estate Group of Cos., to run the new office and spearhead Pinnacle's growth in the Chicago market. The company will focus on third-party management of multifamily and commercial real estate as well as expand into high-end condominium association management. Pinnacle manages more than 132,000 multifamily units across the country.
Rooms for Rent
Apartment vacancies rose at the end of 2006.
Apartment owners across the country are seeing more empty units than they might have expected. In spite of limited addition to the national inventory, the vacancy rate for apartments in 2006 rose by 20 basis points to end the year at 5.9 percent, up from 5.5 percent in the third quarter and 5.7 percent a year earlier, according to Reis, a New York-based research firm.
“The fourth quarter is generally slower than the second or third, so we expected slightly weaker results—but the 40-basis-point rise in vacancy at the national level was larger than we expected,” says Sam Chandan, Reis' chief economist.
A number of factors spurred this jump, including the increased supply from failed condominium projects turned rental; a continued demand, though slower than 2005, for single-family homes and condos; rising rents (asking rents in the fourth quarter of 2006 rose by .8 percent to $983, marking the 19th consecutive quarter of gains at the national level, according to Reis); and, of course, seasonal factors (fewer people move at the end of the year).
Ric Campo, CEO and chairman of the board of Camden Property Trust, saw increased vacancies in his national portfolio at the end of last year, but says that isn't necessarily a negative. “I would much rather have lower occupancy and higher revenue than higher occupancy and lower revenue,” he says.
Last year, Camden and other firms voraciously raised rents, and higher vacancies are a natural effect of higher rents, Campo explains. “If somebody is at 99 percent occupancy, that sounds good, but that means they are not pushing their rents [hard enough].”
Dave Woodward, managing partner and CEO of Laramar Communities, hasn't experienced a substantial rise in vacancies at his company's properties, but he has noticed softening in Florida markets due to the condo backlash. “We have had to offer some specials in some cases—it's just becoming a little more challenging,” says Woodward. “And I think there's more of that coming. There are more failed condo deals that have yet to hit.”
Despite such challenges, apartment experts are predicting a healthy 2007. While the vacancy rate is projected to rise to 6 percent by the end of this year, asking and effective rents are projected to rise by 3.5 percent and 3.7 percent respectively, according to Reis. “Will '07 be as strong as '06? That is hard to say,” says Campo. “'06 was a banner year for most companies, and I think '07 is going to be a good year. Whether it's a banner year will really depend on what happens with job growth through the year.”
The Cheval Apartments, Houston
Living at the Cheval Apartments in Houston is akin to living at the Ritz-Carlton. At least, that's the type of ambiance A.G. Spanos, the property's Stockton, Calif.-based builder and developer, was aiming for.
The Cheval does offer its residents a taste of opulent, extravagant living. The 387-unit, four-level project features a multi-tiered swimming pool, sunning benches, a sandy beach-like area near the pool, a beach volleyball court, and massage and sauna rooms. Lush terraced plantings surround the complex, giving it a resort-style look and feel.
“[The Cheval] is a rental apartment, but it's like you're living in a ritzy hotel,” says Charlie Raffo, A.G. Spanos' executive vice president. Another added bonus: Residents get free coffee from a Starbucks vending machine. Now that's luxury living.
Couples and single professionals are the property's primary target. One-and two-bedroom floor plans ranging in size from 617 square feet to 1,198 square feet are available, and the property has its own parking garage.
Raffo, who served as project leader for The Cheval, envisioned the property to be cutting-edge, positioning it as a leader in the rental apartment arena. And indeed, the property seems to stretch the expectations for customary amenities. So far, The Cheval is the first of its kind for A.G. Spanos, but Raffo says more high-end amenity properties similar to The Cheval are on their way in major metro cities including Denver, Dallas, and Atlanta.
Standard monthly rents go from $995 to $1,600. The project was built on a 10.2-acre infill site that once housed an old computer building. Density is 38 units per acre.
Maitland, Fla.-based architectural firm Charlan-Brock & Associates designed the Mediterranean-themed apartment. The Cheval, managed by A.G. Spanos, opened in July 2005 and is 90 percent occupied.