Apartment building investment loans in 2014, thoughts and predictions on what’s in store from lenders large and small and the organizations who represent them:
Greystone via MultiHousingNews: We do think there will be more capital available,” says Bob Barolak, co-COO at Greystone. Lenders will become even more eager to make loans in the multifamily space, he says, because of greater confidence in the economy and markets.
Another major reason for an expected bump in capital available in the next 12 months is that CMBS financing has come back into the multifamily sector—from a volume of practically zero in 2012. They will continue to increase market share significantly in 2014.” Currently, CMBS multifamily financings are carrying interest rates of about 5.10 to 5.20 percent, or about 10 to 15 basis points lower than rates in Fannie Mae transactions, according to Barolak.
Maximum LTVs on CMBS loans—up to 75 percent on 10-year terms for multifamily properties—have also become competitive with those of Fannie and Freddie loans. Moreover, CMBS lenders can become “extremely aggressive” for deals they want to acquire to round up a securitization pool, Barolak says. In such instances, “they can dramatically lower the interest rate significantly below what Fannie and Freddie will offer.”
Life insurance companies are another investor group that may also increase their financing volumes in 2014. All indications are that life companies’ appetite for multifamily is only going to grow in 2014, Barolak says. “Everything we are hearing suggests they will.”
Commercial banks constitute a financing source that may not necessarily increase its volume this year, but will at least maintain the same level. The banks have resolved many of their balance sheet issues and are once again looking for high-yielding real estate business opportunities. Regional, local and community banks in particular have become noticeably active again in the past year.
Another available multifamily financing option that is anticipated to remain steady is FHA-insured financing, which is expected to continue at the maximum loan commitment level of $25 billion, a level that has been repeatedly reached early in each of the last few years.
The prognostication for increased capital flows is balanced somewhat by possible pullback by Fannie and Freddie, and widely expected increases in interest rates some time this year. Last year, Fannie Mae and Freddie Mac were mandated by their regulator and conservator the Federal Housing Finance Agency (FHFA) to reduce their multifamily financing volume by 10 percent. At press time, it was still an open question whether FHFA would continue to shrink Fannie and Freddie’s footprint further for 2014.
Rising interest rates, on the other hand, could impact the availability of capital for multifamily, as the yields for alternative investments increase and compete for investor dollars. Nevertheless, the effects of any rise in interest rates on multifamily transactions may be limited: interest rates are still historically low, and increasing NOIs could compensate for the higher interest rates.
Mortgage Bankers Association (MBA) survey via Nat Mortgage Pro Mag
Commercial and multifamily mortgage lending is expected to increase in 2014, as lenders’ appetites to place new loans grow even stronger, according to a new Mortgage Bankers Association survey of the top commercial and multifamily mortgage origination firms. Lenders were also polled on their expectations for borrower appetites in the New Year. A full 91 percent of the top firms expect originations to increase in 2014, with 48 percent expecting an increase of five percent or more. Almost two-thirds (64 percent) expect their own firm’s originations to increase by five percent or more.
“Commercial and multifamily lenders anticipate a market in which lending continues to grow and their firm gets a bigger piece of the pie,” said Jamie Woodwell, MBA’s vice president for Commercial Real Estate Research. “Borrowers’ appetites to take out new loans are expected to remain strong, but perhaps drop a bit from 2013 levels. The resulting competition to lend leads originators to expect loan risk to increase marginally in the face of moderating returns.”
Specific study findings include:
►In 2014, lenders are expected to have a greater appetite to place loans, and borrowers a weaker appetite to take out loans. Compared to 2013, an even greater share of respondents expect lenders to have a “very strong” desire to make loans (65 percent of respondents anticipate “very strong” appetite versus 53 percent in 2013) and more expect borrowers to have only a “fair” appetite to take out new loans (23 percent versus 16 percent in 2013).
►Originators expect the market to grow at a moderate pace in 2014 (and their own firms to grow more quickly). Almost half (48 percent) of respondents expect total market originations to increase five percent or more in 2014. Almost two-thirds (64 percent) expect their own originations to increase by five percent or more.
►Loans for commercial mortgage-backed securities (CMBS), banks and life companies are expected to increase in 2014; loans for Fannie, Freddie and FHA to decrease. Originations are expected to increase for commercial mortgage-backed securities (85 percent anticipate growth to be greater than five percent), bank portfolios (78 percent anticipate growth to be greater than five percent) and pension/life insurance companies (56 percent anticipate growth to be greater five percent) and decrease for Fannie Mae and Freddie Mac (60 percent anticipate declines) and FHA (51 percent anticipate declines).
►Loan risk is expected to increase in 2014. Most respondents characterized the loans made in 2013 as “medium” to “somewhat low” risk (88 percent). In 2014, more respondents expect loans to be “medium” to “somewhat high” risk (89 percent). Lenders were surveyed on a scale of very low, somewhat low, medium, somewhat high, and high.
►Loan return is expected to moderate in 2014. Half of respondents (50 percent) characterized the loans made in 2013 as “medium” return. In 2014, nearly three-quarters (74 percent) expect loans to be “medium” return.
From the Commercial Real Estate Finance Council (CREFC) 2014 Outlook Survey via GlobeSt.:
“This is the first broad based market outlook survey that we have done,” CREFC President and CEO Stephen M. Renna tells GlobeSt.com. “It is an important survey because it consists of feedback from all lending sectors.”
Floaters (Adjustable rate loans) will become a fixture in the conduit market. There will be an increase in interest-only CMBS issuances and that is a “most concerning trend.” Cap rates will rise by at least 20 to 30 basis points in the next year as interest rates rise.
Other predictions from the survey:
• Loan underwriting standards will tighten in response to rising interest rates. 83% of CREFC members say this will happen.
• The multifamily sector will see the largest percentage increase in conduit lending in 2014, according to 59% of CREFC members.
• The multifamily, office and hotel sectors will experience the largest increase in rental-rate growth nationally in 2014.
• 79% of CREFC members believe cap rates will rise by at least 20-30 basis points in the next year. 18% believe cap rates will rise by 50 or more basis points in 2014.
• Underwriting Standards: 83% of CREFC members expect that the anticipated rise in interest rates will lead to the tightening of commercial real estate loan underwriting standards in 2014.
• Apartment-Sector Lending by Conduits: 59% of CREFC members believe the multifamily sector will experience the largest percentage increase in conduit lending in 2014.
• 39% of CREFC members believe the increasing volume of interest-only loans is the “most concerning trend” in new CMBS issuance underwriting.
On the ‘Small Loan’ (Less than $5M typically) lending market via MultiFamilyExecutive: Industry experts expect the small-loan market to be at least as, if not more, competitive in 2014.
Richard Wolf says New York-based Greystone Servicing Corporation had a healthy amount of small-loan activity this year and he predicts banks and Fannie Mae will continue to be drive competition this year. While banks are aggressive in the major metropolitan areas, Fannie Mae loans are better for a long-term deal in the interior areas of the country, the senior managing director says.
Wolf, the former head of Fannie Mae’s small loan division, believes Fannie will also continue to stay strong on refinancing deals this year, though Wolf expects to see more acquisition activity in the small-balance space this year. “Fannie offers up to 30-year money,” he says. “And 10- to 12-year product is still competitive, not in the major metros, but the areas that aren’t as heavily banked. Right now, Fannie Mae is the best option for something small,” he says. “We might be able to do CMBS down to $3 million, but wouldn’t go below—$3.5 million and above is sweet spot for CMBS.”
Industry officials are hopeful the government-sponsored enterprises (GSEs) will be given more small-loan direction as congressman Mel Watt (D-N.C.) takes lead of the Federal Housing Finance Agency (FHFA). More concrete guidance will dictate how competitive Fannie Mae will be in the small loan space next year, Wolf says. And while Freddie Mac has no small-loan program to date, that may change if Watt decides such a program would further the GSE’s mission.
“Freddie Mac—well, they’re getting interested,” he says. “I think they’ll wait to see what the regulator says what they need to be doing. If small loans are the market they have to be in, well then I think it will give Fannie real competition.” If the Freddie Mac’s K-deals were to start being aggressive with small loans, it could drive better pricing for borrowers and drive Fannie Mae to be more competitive.
“I think small-loan borrowers have a lot of options at their disposal,” he says. “Life companies are out there and I don’t see that changing in 2014. I think they’re still in a good place. There’s low-cost financing available and a variety of options to choose from depending on what they want.”