Secondary Markets: Multifamily's New Frontier
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Secondary multifamily markets are ripe for investment for smaller players, while the larger institutions continue to focus on class A assets in gateway markets. That was one of the main messages from our conversation with Morgan Ferris, senior vice president income property lending, at BofI Federal Bank. His firm is one of our Thought Leader partners on Multifamily Leader, as part of our coverage of MBA's CREF/Multifamily Housing Convention & Expo earlier this month.
Globest.com: Were there any surprises about the market at MBAís CREF multifamily conference, or were your prior impressions reinforced?
Morgan Ferris: There werenít any surprises to what we see in the marketplace or where things are going. It kind of solidified our overall thoughts. There appears to be some very buoyant mood for the next year. A lot is very positive.
Globest.com: Do you see that momentum going into secondary markets as well?
Ferris: Iím hoping that excitement moves into the secondary markets and what all the banks have been doing in regards to providing liquidity for the market opens up in the secondary market. Weíre definitely hoping to see that.
Globest.com: Do you have any insights on GSE reform or did you gain any at the conference?
Ferris: I havenít heard anything new or definitive. Obviously, itís in everybodyís cross hairs. Everybody thinks that something is going to happen. I donít think it will be definitive any time soon. I just read that their overall market share came down and most likely will continue to come down. Their original charter for multifamily was put into place for low-to-moderate-income housing to make sure there was a liquid market there. Over the last 10 or 15 years they have moved into the class A product and out stepped their bounds. Theyíve tried to step back in at different points into the small balance, and thatís where the GSEís could add a lot of liquidity into the market. It would really help open it up if they were to step in strongly.
Globest.com: Have you seen you client base change much lately as far as who is interested in investing in multifamily?
Ferris: There is a massive pent-up demand for the product in regards to our investors, being specialists in the small-balance arena. Our investors tend to be smaller, anywhere from having 10 to 1,000 units, and although they can be very sophisticated, they are more small businesses. The typical investor is mostly in the market they play in and add value to that local marketplace. Most of our clients are not broad, national players. They are very market specific. There is quite a bit of money sitting on the sidelines waiting. There is a discrepancy between what the sellers are willing to take versus what the buyers are willing to offer. That hasnít equalized yet, so the purchase market hasnít caught up to where it will be until thereís more grounding in the overall marketplace.
Globest.com: So you donít see multifamily overheating any time soon?
Ferris: In regards to the GSE and the class A-type properties, there is a possibility of that overheating. For the small-balance players, I do not see that blowing up or overheating because the underwriting standards that most small-balance lenders underwrite to typically are getting a little higher yield. Theyíre not chasing the class A towers. The small balance tend to rent to people that need to rent and are going to continue to rent and are long term. Thatís a great place to be.
We do not see our space overheating and blowing up to the extent that the larger class A product may. Right now the government is artificially pushing down the rates, and that in turn pushes down cap rates, and right now those big players that are buying $100 million to $300 million at a time have got no place else to put their money. They can put it in a bond making 1% or 2% or they can buy a class A apartment building making 3% or 4%, plus appreciation, and theyíre going to go in that direction. But thatís artificial. Those rates can not hold, and as soon as those change, whatís that going to do to cap rates and whatís going to happen to those buildings.
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