ORLANDO—Despite recovering volumes, falling vacancies and increased rent growth, the multifamily sector continues to face risks, analysts said at the Mortgage Bankers Association‘s Commercial Real Estate Finance/Multifamily Housing Convention & Expo, held here this week.
“The markets—both debt and property—are very healthy, vibrant and in balance,” said Mark Beisler, managing director with Wells Fargo Multifamily Capital. “Both agencies and banks are navigating well. They’re certainly anticipating more competition in 2014 over 2013, but they’re prepared for it and entering the market with eyes wide open. They’re going to compete on price over credit.”
Beisler said he has observed a “blurring of lines” between capital sources. “Life companies are more active in construction lending; banks are entering the permanent market and doing more seven- and 10-year business,” he said. “And multifamily is going to be a bigger component of the commercial mortgage-backed securities market going forward.”
“Overall we’re in a very good place nationally for multifamily,” said David Durning, president and CEO of Prudential Mortgage Capital Co. “Nationwide vacancy rates are at about 4% and headed down; they’re approaching their lowest levels in 13 or 14 years. We’re really at a pre-crisis normalization where you have 2.5% rent growth, which is also a healthy place to be. At a 5% annual growth rate, income is at a healthy and attractive level. Finally, on an overall basis multifamily pricing is back to peak levels and moving forward from there.”
Durning added the apartment market “shows a positive dynamic between supply and demand.”
Gregory Reimers, Northeast market manager of real estate banking with J.P. Morgan, said he feels “very good” about multifamily. “Our various multifamily businesses have performed relatively well. Demographically we still feel very good about the markets in which we’re operating,” he said, adding J.P. Morgan plans to grow its multifamily lending platform this year.
Some take a more cautious look. “We’re very healthy in terms of multifamily,” said David Brickman, senior vice president with Freddie Mac Multifamily. “Nonetheless, we’re starting to plateau a little bit in terms of tailwinds. There is a lot of competition from our perspective. We will focus on where our strengths are, what markets we’ve done well in and meet the changing needs of our borrowers.”
Headwinds could harm the sector’s continued strong performance, especially rising interest rates. “The Fed is gradually going to begin to remove its stimulus from the economy; that will affect rates and spreads,” Brickman said.
Reimers said the recent interest rate environment has been distortive. “You get used to it, but you know it’s not going to be the state of affairs for the long haul,” he said. “We all anticipate that rates will be going up, so look at the underwriting. Take a look at the loan; at 200 basis points higher what does it looks like? Look at property performance. What’s going to happen with rent and property expenses? If you think rates are going up and cap rate and debt yields are going down, that’s a blinking yellow light that you’d better have your eyes open.”
Brickman said Freddie Mac models for exit risk by examining the larger economic environment as well as the individual asset and its submarket to examine rent growth. “We think that rents will go up as interest rates go up,” he said. “We also think about where values might be. It’s science that becomes art.”
Jeffrey Hayward, senior vice president and head of multifamily mortgage business with Fannie Mae, said some supply-constrained markets will see very compressed cap rates, “but that’s in certain markets; not a national trend. We believe cap rates overall will be steady, about where they were in 2013 and in 2012, but individual markets could be different,” he said.
Reprinted with permission from MBA NewsLink and the Mortgage Bankers Association.