It will come as no surprise to commercial mortgage brokers that the real estate sector has struggled this year. Yet the performance of some asset classes have greatly exceeded others, and that includes a strong showing by the multifamily sector.
Apartment landlords still face challenges. A recent influx in new rental unit deliveries has caused both occupancy and rental growth figures to decrease slightly. The expectation is, however, that this temporary surge in deliveries will be absorbed in the near term.
Continuing to demonstrate strength in recent years, multifamily is a sector that commercial brokers should follow closely because it continues to face plenty of demand, including in the affordable and workforce housing categories. Additionally, in recent years more and more renters with higher incomes have also chosen to rent as they have been priced out of the for-sale housing market.
“Nationwide, 89% of new apartments built in the last few years are considered high end, aimed at renters earning more than $75,000.”
Mixed picture
Nationwide, 89% of new apartments built in the last few years are considered high end, aimed at renters earning more than $75,000 per year, according to PBS. Thus, demand for both affordable and workforce rental housing units remains heightened.
Overall, any softening in the apartments market, especially surrounding rent rate growth and occupancy, should be considered temporary because there is continued renter demand, and the for-sale housing market is unaffordable for many.
As brokers know too well, apartment buyers and sellers have faced a disconnect on property valuations during this high-interest environment. With rates significantly higher than they were before inflation began to skyrocket, transaction volume has been limited, making it difficult to assess cap rates.
Thus, buyers cannot pay what they could just a few years ago, stalling many sales transactions. Additionally, property maintenance and improvement costs have increased while rent growth has simultaneously slowed, challenging owners faced with less robust cash flow.
Insurance also continues to be a pain point for many. Premiums have increased and some regions impacted by severe weather have driven insurers out altogether, putting owners at risk.
Falling rates
But some relief on pricing is on the horizon. Consumer Price Index data indicated that U.S. inflation had slowed to 2.5% in August, showing that the Federal Reserve’s efforts to tamp down inflation appear to be working.
The Fed announced in September a 50-basis points interest rate cut and more may be coming before the end of this year. Home loan rates, which had been falling since July, responded by continuing a downward movement. The 30-year fixed rate mortgage dropped to 6.08% for the week of Sept. 26, according to Freddie Mac.
Interest rate cuts are anticipated to improve the multifamily finance environment overall. With interest rates having remained elevated for a prolonged period, multifamily lending had declined significantly between 2022 and 2023.
In an August report, the Mortgage Bankers Association (MBA) noted that the heightened interest rates had resulted in a 49% drop in apartment community lending, as well as a lowered appetite among owners to refinance properties, contributing to the sector’s lower loan volume.
MBA reported that of the $246 billion in 2023 multifamily loans, the greatest share measured by dollar volume was attributed to Fannie Mae and Freddie Mac. The mission of the government-sponsored enterprises (GSEs) is to provide liquidity in the rental housing arena, even when economic and interest rate dynamics push other lenders out of the market.
Their dominant share of the total 2023 lending volume is not surprising. Fannie and Freddie together held 42% of the total multifamily loans last year. Fannie Mae closed out 2023 having completed more than $52 billion in financing to support the apartment market, while Freddie Mac reported a $49 billion total in multifamily lending.
Dedicated mission
Now that interest rates are falling, brokers should be aware that the multifamily market is expected to heat up and they can look to Fannie Mae and Freddie Mac for financing of workforce and low-income housing options. As a key part of their mission objective, these agencies are committed to supporting housing for Americans with lower incomes and are a critical resource for borrowers looking to fund projects across the country. This is especially true today when so many other multifamily lenders are sitting on the sidelines waiting for improved economic conditions before they actively return to lending.
Brokers need to be aware that Fannie and Freddie offer finance solutions that some of their clients may be unfamiliar with, including loans for sustainable multifamily properties. These green financing loans are accessible to borrowers working to enhance energy and water conservation within their rental properties.
The two agencies also offer financing benefits to sponsors who agree to self-restrict some of their unit rents to certain income levels. Each of these programs looks to provide stable and affordable housing to tenants with modest-to-low incomes by offering landlords incentives. Freddie is focused on providing housing for middle-income families. In fact, of the more than 10 million rental units it has funded, more than 90% are affordable to renters with low or moderate incomes. While information on these programs can be found on each of the GSEs websites, the best way for borrowers to navigate all of their details, parameters and guidelines — as well as to determine which they are eligible to take advantage of — is to work directly with a trusted lender partner to both agencies.
