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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   March 2014

Optimism for Multifamily Lending Is in the Air

Challenges and uncertainty are inspiring innovative solutions

This year likely will be a defining period in multifamily lending, building upon the past several years of growth to reveal opportunities for industry innovation and breakthrough partnerships.

And yet, there is no lack of challenges to overcome in order to continue generating positive multifamily lending volume. Commercial lenders are facing the threat of new volume restrictions for Fannie Mae and Freddie Mac government-sponsored enterprises (GSEs) now under conservatorship, with their fate potentially hanging in the balance. In addition, there’s the ominous if and when “taper” question, and a spate of residual mortgage-security settlements from the crash in 2008. In the meantime, homeownership levels remain stagnant and the demand for apartment rentals is gaining steam once again.

It will be interesting to note how the multifamily sector plans to catalyze the following conditions for future growth.

Growth opportunities

One particularly interesting reentrant to the multifamily lending landscape is commercial mortgage-backed securities (CMBS). The CMBS issuance volume for conduit lenders topped $85 billion this past year, a 77.9 percent increase compared to 2012. This renaissance proves that investor demand for mortgage securities remains high, reflecting renewed confidence that stricter underwriting standards will make conduit lending an even stronger channel than in the past.

Although the GSEs remain significant players in multifamily lending, regulators will continue to debate what their role should be in mortgage finance going forward. In the meantime, lenders must anticipate potential change, and are exploring alternatives to continue providing palatable financing solutions for borrowers. One of these is the development of proprietary loan products that leverage funds from institutional investors, such as pension funds. And although the Fannie Mae Delegated Underwriting and Servicing (DUS) franchise has kept private capital in the lending market, new players are entering the space to share both the risks and rewards of the U.S. mortgage market.

Another growth strategy taken on by some multifamily lenders, though not necessarily new, is regional targeting. This year, several “undiscovered” regions may prove to be ripe for lending activity as multifamily demand increases overall. According to Reis Inc., the national vacancy rate fell to 4.2 percent in this past third quarter. This rate is the lowest since 2001, with New Haven, Conn., and Syracuse, N.Y., posting rates of 2 percent and 2.1 percent, respectively, in the past third quarter. At that time, 11 markets had vacancy rates lower than 3 percent, with the East Coast and California revealing greatest demand for new supply.

Some lenders might find that setting up shop to focus on a particular region is a growth strategy worth pursuing. By focusing resources on a particular secondary or tertiary market with underlying potential, lenders can root out borrower demand for a particular city, and become local market experts.

Specialty sectors

Although multifamily activity should continue to be stable this year, another related segment that is showing strong signs of demand is health care lending — specifically, assisted living and skilled nursing facilities. According to the Mortgage Bankers Association, there was a 124 percent increase in loan volume for health care properties in this past third quarter compared to the same period in 2012.

Similar to multifamily, a shift also is occurring as a result of increased demand for senior housing, where acquisitions and new construction are gaining steam. For example, the National Investment Center for the Seniors Housing & Care Industry reported that the number of assisted living units under construction increased 39 percent year over year this past third quarter. 

Another area showing surging demand for financing capital is affordable housing. This niche requires lenders not only be knowledgeable about Low-Income Housing Tax Credits, but also be able to explore innovative deals that can satisfy both the acquirers’ need for returns and the immense community demand for housing at below-market rates. An example of a creative way to take advantage of this niche is to secure a loan for a tenant-in-place rehabilitation using short-term tax-exempt bonds.

Apply creativity

The one constant in the real estate sector is that nothing is constant. Multifamily lenders must remain incredibly nimble to navigate the continually changing landscape. Adept lending providers will anticipate how wavering interest rates, potential uncertainties in GSE participation and regulatory changes can create opportunities, not challenges. Examples of creating opportunities in this professional and economic climate are a private lender that partners with a bank to create a financing structure on which they otherwise may compete, or one that sources new avenues of capital, such as pension funds, to create loan products that serve customers who are at a loss for options.

The allure of a reformed CMBS market, rising demand for specialty housing and new regional growth in surprising places should all contribute to an exciting and active year for commercial real estate finance professionals. 

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