A panel at the Urban Land Institute’s 2011 Fall Meeting has concluded that operations of government-sponsored service enterprises (GSEs) like Fannie Mae and Freddie Mac may not change as much as some have predicted. While they are likely to have a smaller share of business, their role is also likely to continue in some form, meeting critical underserved markets such as affordable housing. There will be notable changes in multi-family rental lending, though the outlook is generally positive.
Moderator Daryl Carter, Chair and CEO of Avanath Capital Management, asked the panelists to predict what they thought might replace the business done currently by GSEs, and what impact that shift might have for the market. Diana Reid, Executive Vice President of PNC Real Estate Finance, suggested that two sources of capital might be banks and capital markets, which may rely on a new non-government guaranteed vehicle.
Scott Anderson, Senior Director of TIAA-Cref Global Real Estate, suggested that firms like his are able to pick up any slack. They continue to be optimistic in the near and long term, with $1.2 billion of new acquisitions this year, on top of $1.8 billion in existing assets.
David Durning, Senior Managing Director of Prudential Mortgage Capital, recounted his firm’s early involvement in multifamily at a time it was out of favor as an asset class. They became GSE lenders soon afterwards. GSEs create the space to standardize underwriting, but they are not for everyone, since “different borrowers have different appetites.”
“We have all benefitted from credit liquidity,” said Scott Anderson. “I think you’ve seen other folks step up and take market share” from the GSEs. But if GSEs remove themselves entirely from the multifamily and single family side, this could be very damaging.
Daryl Carter expects a moderate shift from the aggressive home ownership policies of the past, which would favor rentals. He noted another problematic issue – Fannie Mae and Freddie Mac brought liquidity into third-tier markets that didn’t have them. What will happen if they reduce their volume by 50%?
The panel polled the audience on whether they expected a major reduction in funding by Fannie Mae and Freddie Mac for multi-family – more than 50% – within two years, or within five years. No audience members believed a reduction was likely in two years, but about 25% believed a reduction was likely in five years.
The panel then answered the same question. Daryl Carter sees business as usual for the next two years, and five years could see a reduction as $90 billion in current loans rolls over, and other emerging players come into the market and take share.
Scott Anderson is bullish for the next two years, but the next five years is less clear – it will depend on the election, he thinks.
David Durning agreed, but sees a strong outlook in general for the five-year period. The credit crunch has dampened construction while fundamentals remained strong, so “we should have a pretty nice place for multi-family business, as a lender or as an owner.”
Daryl Carter sees a special opportunity in student housing, as educational institutions shift to private solutions. Another very important under-served market is affordable housing. How will this be served, if not by GSEs?
David Durning agreed that the “Achilles’ heel” is affordable housing. He believes we need leadership from Washington on this, because lack of affordable housing will put a drag on growth overall.
