There’s no question that Fannie Mae and Freddie Mac have kept the apartment market afloat in recent years, just as they have propped up the single-family sector. But private lenders are warming to the task.
So much so that Sharon Dworkin Bell, senior vice president for multifamily housing at the National Association of Home Builders (NAHB), is worried that lenders who know nothing about the sector will soon flood the market.
“It makes me nervous that amateurs will move into apartment development, make a mess, and then leave,” Bell said at the Pacific Coast Builders Conference (PCBC) in San Francisco earlier this summer. PCBC is the country’s largest regional housing trade show, second only to the huge NAHB annual convention and exposition.
Fannie Mae’s Paul Lewis also is concerned—not so much about amateurs, but about lenders’ ability to remain disciplined in the face of strong competition for borrowers. Lewis’s fear, he told PCBC’s annual multifamily trends section, is that in “recklessly pursuing” deals, they will “ignore the red flags” that always get apartment lenders into trouble.
“We’re already seeing signs of overheating,” the Fannie Mae executive said. “A lot of money is looking to come in [to the apartment market], but there are not a lot of opportunities.”
The apartment sector has been flooded with capital before, so anxiety that it could happen again is very real. But that’s a concern for another day, both speakers admitted. For now, all systems are go. Together, Fannie Mae and Freddie Mac funded $32 billion in apartment deals last year and are on pace—$8 billion in the first quarter—to equal that production again in 2011.
However, that’s just a drop in the proverbial bucket when compared to what’s needed, according to the NAHB’s figures. After starting a near record low of just 103,000 apartments in buildings of five units or more in 2010, developers are expected to begin 136,000 more units this year and 146,000 more in 2012, the group’s economists say.
But even that improved pace is “only half” of the 300,000 to 350,000 rental units that are needed every year just to keep up with demand, Bell told the conference. Hence, the rush by lenders such as Intervest Mortgage Investment, a division of Sterling Savings Bank, to help fill the void. The company has offices in Oakland, California; Portland, Oregon; and Kirkland, Washington.
Last year, Sterling was on its heels and, in the words of Marshall DeWolfe, who is director of loan production for Intervest, was “on life support.” But in October, the bank received an infusion of capital and “started a multifamily lending platform up and down the Pacific Coast,” DeWolfe told the conference. And now, he added, “everybody’s” following suit.
“When we allowed cash-out refinancing and 70 percent LTVs [loan-to-values], other lenders gasped, but now they are there,” he said. “They did the same thing in other instances, and now more and more players are coming into the marketplace, and that will continue.”
As a backdrop to the “Capital Markets and Apartment Financing” panel, two reports released at the conference—one from Marcus & Millichap Real Estate Investment Services, one of the country’s largest commercial real estate brokerages with offices nationwide, and the other from RealFacts and southern California–based researcher Jeff Meyers—confirmed the renewed interest in multifamily.
Although Fannie Mae and Freddie Mac are still the primary source of apartment mortgage originations, accounting for just over half the market, local and regional banks and life insurance companies are expanding their efforts to take a larger share of the business, the report by Marcus & Millichap (M&M) said. But real estate investment trusts (REITs) are likely to lead the charge, the company said, because REITs have plenty of money as well as “healthy lines of local cost credit.”
According to M&M’s “Apartment Outlook,” the recent increase in multifamily permits won’t result in finished units for 12 to 18 months. Thus, a three- to four-year window exists before supply reaches a level considered risky.
The report also touched on the market’s strong fundamentals. The minimal supply of new units, combined with demographic trends that will—among other things—see some 3 million young adults who remained with their families or moved back in with them over the last five years start to go out on their own, should result in a “notable decline” in vacancy rates. Indeed, the company predicted that for the first time in 20 years, all 45 of the metropolitan areas it tracks will register a drop in apartment vacancies.
Noting that “a flood of institutional lenders and investors [are] flocking to multifamily product,” the RealTrack/Meyers study also forecast a steep rise in permit activity. Maybe not to the level witnessed in 1972, when the first of the baby boomers started moving out on their own, but perhaps 600,000 by 2014, it predicted.
Meanwhile, the NAHB is now saying that any sustained housing recovery will take hold in multifamily first. The association estimates there are some 2.1 million deferred households, and as they emerge from whatever living situation they have cobbled together, they will strike out on their own as renters as the economy and job markets improve even before existing renters and first-time homebuyers have any significant impact on the for-sale sector.