Are you Making Bank on Multfamily?

Question

OPTIMISM FOR MULTI-FAMILY LENDING IS IN THE AIRThis year likely will be a defining period in multi-family 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 multi-family 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 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 multi-family sector plans to catalyze the following conditions for future growth.GROWTH OPPORTUNITIESOne particularly interesting reentrant to the multi-family ending 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 multi-family 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 US mortgage market.Another growth strategy taken on by some multi-family lenders, though not necessarily new, is regional targeting. This year, several “undiscovered” regions may prove to be ripe for lending activity as multi-family 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, Connecticut and Syracuse, NY 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 secondary or tertiary market with underlying potential, lenders can root out borrower demand for a particular city, and become local market experts.SPECIALTY SECTORSAlthough multi-family activity should continue to be stable this year, another related segment that is showing strong signs of demand this year is health care lending- specifically assisted living and skilled nursing facilities. According to the skilled Mortgage Brokers Association, there was 124 percent increase in loan volume for health care properties in this past third quarter compared to the same period in 2012.Similar to multi-family, 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 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 CREATIVITYThe one constant in the real estate sector is that nothing is constant. Multi-family 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 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 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.

Dan Brewer · Answer

Will - You echo my sentiments on senior housing completely. I have bencome a very stong proponent of senior housing. They had their own capital market "collpase" around 2000, and it was exascerbated by the 2007 crash. Yet baby boomers began retiring in 2007. Ironically, this was a contributor to the crash - read "The Great Depression Ahead" by Harry Dent. 10,000 babyboomers will retire each and every day for the next 22 years. With supply way down due to a 12 -13 year capital drought, and demand way up due to retirees, senior housing and assisted living is a sector everyone should take a very hard look at. For more information, simply go to www.seniorlivingfund.com.