The Biggest Guys in the Room
The biggest news for the multifamily industry in 2013 came not at the beginning of the year, when Federal Housing Finance Agency acting director Edward J. DeMarco released the agency’s 2013 Conservatorship Scorecard for Fannie Mae and Freddie Mac, revealing that there would be a 10% reduction target in business volume from 2012 levels.
Nor could it be said that the GSEs’ big moment came in the fourth quarter, when they suddenly ramped up their aggressiveness because, even with the 10% haircut, they found themselves with excess capacity. And while Fairholme Capital Management’s proposal to acquire Fannie Mae and Freddie Mac’s operations in November was exciting and innovative, it was also quite short-lived. So it, too, gets eliminated from consideration for the short list of the GSEs’ pivotal moment of the year.
So what would make the cut for “Most Important Day in 2013 for Multifamily Finance?” One would argue it is Nov. 21—when the Senate voted to eliminate the use of the filibuster against the majority of presidential nominees. Leaving politics aside—and yes, this can be an uphill climb—that move undoubtedly paved the way for the confirmation of Rep. Mel Watt (D-North Carolina) as director of FHFA by a 57-41 largely partisan vote.
Watt is included in Real Estate Forum’s Names to Watch for 2014. While he brings serious creds to the position—Watt has a long history of overseeing the GSEs—his confirmation isn’t pivotal because of him, his record or his party affiliation.
Rather, it’s the mere fact that the GSEs have a permanent head at the helm of their regulatory body, which instills certainty and continuity as they move into uncharted waters.
To be blunt, the way the industry is structured right now, private sector multifamily—for all its growth of the past year—is still secondary to the GSEs.
“Multifamily is dominated by Fannie and Freddie,” says Clay Sublett, senior vice president at KeyBank Real Estate Capital. There are other sources—CMBS and life and banking lending—but they cannot hold their own against the GSEs. “It is not a level playing field,” Sublett says. “When Fannie and Freddie decide to step on the gas they can clearly dominate the market.”
The Private Sector Pushes Back
Not that the private sector is a nonentity in this space, or that it would not be able to step up if the GSEs were to be disbanded (a highly doubtful scenario in the run-up to an election year). In recent months a number of developments have suggested that the private sector is itching to take a greater run at the multifamily finance space.
In November, Walker & Dunlop and Fortress Investment Group announced the launch of a CMBS lending platform from which the company hopes to originate $1 billion a year, starting at the beginning of 2014. Also part of the mix will be high-yield whole loans, mezzanine debt and preferred equity. Tim Koltermann, who was tapped to head the group, says that one reason for the launch is that the agencies have started to pull back from their multifamily finance operations and W&D saw the need to step in.
“As we look at the marketplace, because of Dodd-Frank and Basel, there is a lot of activity that money banks can no longer finance—they can’t offer an all-end solution under one roof anymore,” he says. “So that is what we are trying to do.”
In August, Capital One announced it was acquiring multifamily originator Beech Street Capital in the fourth quarter, which it duly did—creating, with the stroke of a pen, a combined entity that is the fifth largest national multifamily loan originator. The two companies saw the acquisition as a way to balance out each other’s strengths and weaknesses. “There are clearly other markets we are not that strong in and would like to be and thoroughly expect to make inroads,” Rick Lyon, head of commercial real estate banking, Capital One, said at the time of the deal’s announcement.
Existing providers, as well, happily step up to the plate for deals, when they can. In April, for instance, TIAA-CREF provided $86.8 million in acquisition financing for Monument Park, a 460-unit, class A multi-housing community in Fairfax, VA. HFF helped secure the financing on behalf of a private real estate fund advised by Crow Holdings Capital Partners. It is a 10-year fixed rate loan.
On the smaller scale, there is the example of the $28.6-million senior construction loan MAC Realty Advisers placed with a national bank for the development of Kalorama West, a 117-unit apartment building in Washington, DC.
A number of lenders competed for the infill project and the loan required virtually no new cash equity, according to MAC executives. Life insurance companies as well have a strong appetite for multifamily loans—when they can win them from Fannie Mae and Freddie Mac, that is. About 12% of their total commercial real estate loan originations go to this category, Sublett says.
But in truth, these private-sector originations are more the exception than the rule. More typical of deals in the industry are those like the $28.2-million acquisition financing NorthMarq’s Los Angeles regional office arranged for Pinnacle Canyon View Apartments, a 288-unit multifamily property in Orem, UT. NorthMarq secured the financing through a Fannie Mae DUS Lender.
Or they are like the $40.5-million refinancing NorthMarq arranged for two multifamily properties in California—$17.7 million for Austin Commons Apartments in Hayward and $22.8 million for Gateway Apartments of San Leandro—in which the broker got Freddie Mac comfortable with the combination of cash out, month-to-month leases at the properties and the TIC borrower structure. Despite the huge prepayment penalties on the existing loans coming due in 2015, the sponsor wanted to lock in on the low interest rates available from Freddie Mac.
In short, by their strength and aggressiveness, Fannie Mae and Freddie Mac get the cream of the crop—and private sector sources of multifamily finance suffer as a result.
CMBS shops continue to struggle with “adverse selection”—that is, the acceptance of second-rate loans because that is all there is, Sublett says. “B piece buyers are always asking securitizers, ‘why this particular deal? Why didn’t the GSEs want it?’“ he says.
For that reason, Sublett says, the highest default rate in CMBS has been multifamily. “Over the last cycle most of the class A and B properties were financed by Fannie Mae and Freddie Mac because, simply, they are more competitive on interest rate and leverage.”
Next: A Very Good Year