Gerson: u201cWe've seen interest rates and spreads on mortgage loans climb, and that has affected all types of real estate lending.u201d

SAN DIEGO-One would think closing nearly $300 million in multifamily loans in one quarter would be cause for celebration, but Gordon Gerson isn’t popping the champagne cork quite yet. The principal of Gerson Law Firm here has been through a few real estate cycles since its inception in 1992 and is aware of how the market corrects itself after a strong quarter like Q2.

In addition to representing non-GSE lenders on commercial real estate loans secured by property other than multifamily, Gerson closed more than 30 Fannie Mae or Freddie Mac loans per month in April, May and June and nearly topped the $300-million mark in total GSE loan closing volume during those months. During the same time period, the firm represented loan servicers on assumptions and other loan-servicing matters related to Fannie Mae and Freddie Mac loans.

Lender engagements include banks, credit unions and private funds. Regarding GSE lending, the firm supports a large number of credit unions with commercial real estate lending platforms. In the second quarter, Gerson’s distressed real estate support group continued to service the needs of lenders and began six new receivership cases; representation of receivers also remained active.

“The second quarter was filled with a very high level of activity in all sectors of the real estate economy,” Gerson tells “We personally observed a strong financing market for multifamily property. Rates during that time period, if not at historic lows, were low by historic standards.”

Gerson says he doesn’t see any commonality among the multifamily investors with whom he’s been working. “Smart investors are smart investors, whether they’re institutional or not institutional and whether they’re large or small.”

He also says his firm hasn’t hit that number in a single quarter—particularly not in a second quarter. “But we have a growing business, and it’s not so much what it means to the economy as to what it means to Gerson Law Firm.”

Still, industry research supports Gerson’s anecdotal evidence. According to the Mortgage Bankers Association, commercial and multifamily mortgage lending and borrowing continued to grow during the second quarter, with second-quarter originations 7% higher than in second-quarter 2012, 36% higher than in first-quarter 2013 and 8% higher year-to-date from last year’s year-to-date levels.

 “The apartment market continues to be the belle of the ball, with multifamily mortgage originations running 31% ahead of last year’s first-half total,” says Jamie Woodwell, VP, commercial real estate research for MBA. “And after a slow start to the year, lending by life-insurance companies surged in the second quarter to record the highest quarterly volume on record for that sector.”

Clearly there’s a growing need for multifamily housing in America, Gerson says. “Because of where interest rates were in the second quarter, we observed that demand. Multifamily became the investment of choice for smart money, and that in a nutshell is where we were last quarter.”

One of the reasons multifamily real estate has become one of the most attractive vehicles for investment has to do with the general direction of the economy, Gerson points out. “As the economy improves, jobs improve, and as jobs improve, all sectors of the economy improve. People who were doubling up in houses are not moving back into apartments. There’s a huge pent-up demand for apartments throughout the US. Young people are putting off buying homes. Since this trend started, you have at least five or six years of college graduates in the workforce who are delaying buying homes. You have some people who are feeling and have felt that maybe renting is a better way to go. And even among seniors, some trends show seniors selling homes or having lost homes and becoming renters.”

All of these factors are increasing the pressure on the multifamily market. “Over the next 20 to 30 years, we will continue to have a growing demand for apartments. At the present rate, we cannot even build fast enough to meet that demand.”

However, despite the strength of multifamily, interest rates are trending upward, which helps fuel Gerson’s caution for the third quarter. “We’ve seen interest rates and spreads on mortgage loans climb, and that has affected all types of real estate lending, but it will affect it in the third quarter. The 10-year Treasury has also increased from where it was in the second quarter, and Fannie Mae and Freddie Mac have increased their spreads so that loan rates have gone from the high 3s and low 4s to the high 4s and in some instances maybe even the high 5s, even though I haven’t seen it yet.”

Investors have begun to pull back this quarter, not buying or financing properties as aggressively as last quarter, Gerson adds. “What we’re seeing right now is a quarter which could be characterized by adjustment of attitude. There’s a shock effect when you’re seeing interest rates rise by half a percent or more on a commercial loan—that translates to a lot of dollars for investors in return on investment. However, many of us in this industry believe that it’s simply a period of adjustment, and we will see a strong [fourth] quarter, mainly because rates—while not at a historic low—still by comparative standards will be historically low.”

One of the main factors influencing how interest rates will go is who will replace Ben Bernanke as chairman of the Federal Reserve at the end of January 2014—Janet Yellen or Larry Summers—which will impact the economy in the last quarter of 2013 and early 2014 in terms of policy, Gerson emphasizes.  “We are also witnessing a slowdown now by virtue of what the Feds did at the end of June. It may be that there’s simply a reset going on in the minds of investors; the question is will that reset lead to accepting a new normal in terms of interest rates, and I believe it will.”