SAN DIEGO—Multifamily lenders need to keep an eye on income growth and factor it into their underwriting standards, in addition to being aware of decreasing affordability in the market, speakers at MBA's CREF/Multifamily Housing Convention & Expo 2017 here told attendees at yesterday's “Emerging Trends in Multifamily” panel. Despite these detractors, the sector is looking healthy and should continue on this path for quite some time, the speakers said.

David Brickman, EVP and head of multifamily for Freddie Mac, said he expects continued growth ahead for multifamily, even with oversupply reported in select markets at certain price points. Supply and absorption are issues in some areas, but rent is growing, and cap-rate spreads are healthy. “I don't see the elevated concern being seen in certain corners.”

Jeffery Hayward, EVP and head of multifamily for Fannie Mae, said income growth needs to be watched, and affordability is a challenge, “but it's going to be a good market for a while,” adding that what we're seeing in interest rates is merely a return to normalcy.

Vince Toye, EVP and GSE head of production for Wells Fargo Bank, N.A., agreed that income growth is the big issue to watch since nothing in the class-B range is being built—it's all A or A+ product. “Job growth must continue,” he added, saying we'll likely see another 18 to 24 months of absorption.

Moderator Michael McRoberts, managing director of PGIM Real Estate Finance, a division of Prudential Financial Inc., presented research that 600,000 new multifamily units are currently under construction nationwide, a number that has steadily increased over time. But Brickman said, “You have to look beyond multifamily to total housing. We're still not building enough housing—not at one million units a year when we need 1.5 million units a year.”

Regarding mortgage originations, Hayward said multifamily is an attractive place for investments; he predicts healthy origination numbers going into 2020.

McRoberts then presented research showing that the amount of rental housing at lower-income levels has been declining over the last five years. Hayward said, “Rents are growing, and as they increase, normal families will not be able to afford them.” He added that this is an equity problem—not a debt problem—which is outside of the GSEs' purview. Brickman noted that debt is encouraged and that the GSEs are bidding up the value of affordable housing. “We need to help create more supply instead,” he said. Hayward commented that “we will finance whatever gets built, but we need to think of that equity portion.”

Moving on to the homeownership rate, which has declined over the last two decades, McRoberts said each 1% decrease represents one million people who have become renters. He asked the panel if they see a movement to rental property, and Hayward said that man Millennials are marrying 10 years later on average than they had been, and a lot of them want to own a home but can't afford it. The sentiment is there, but the mobility costs are higher if you own a home than if you are renting—and mobility is important to this cohort. We'll have to wait and see how this plays out.

Toye agreed that today's college grads are changing companies frequently, and there's lots of mobility, causing them to delay marriage and buying homes. Five to 10 years from now, this may change, he said. Another option is renting a single-family home, which has become more a viable alternative for those who want to get into that market without actually buying. However, the large number of homes that were purchased by investors to rent out during and after the recession have taken a huge chunk of the supply from homeownership, he said.

Brickman said there are two forces that suggest the homeownership rate is not going to rise significantly any time soon. First, with housing affordability low, it takes longer for first-time buyers to save up for a down payment. Second, the population is becoming denser as the country grows, which leads to higher numbers of renters; even Baby Boomers are beginning to rent more now. Toye added that many college grads can't afford even to rent because of their high student-loan payments.

Attendees asked about the impact of micro-units in apartment buildings (these won't move the needle significantly, said Brickman); Airbnb (this could cause liability issues for owners, Brickman said); and GSE reform (Brickman and Hayward said it's business as usual for their agencies—“We're just focused on serving the market; we can't worry about what's out of our control,” said Hayward).

Lastly, McRoberts asked the panelists to sum up the highlights of 2016. Brickman said his firm set records in affordable, a moderate-rehab program and small-business loans. Hayward said 2016 was a record year for affordable and green business, as well as structured finance.

Toye said construction-loan players have stepped back a bit, but “we have continued to lend smartly.” He added that you don't make a ton of money in construction loans because the timeline on the payoff is so long. There has been a pullback as people wait for absorption, and, with interest rates rising, there are not many banks willing to do fixed-rate loans. As a result, banks have been much more selective in what they are willing to lend for construction.

In discussing tax credits, Brickman said workforce housing is diminishing the supply of affordable, so we need private companies to help complement the existing LIHTC program on the low-income side. McRoberts noted that many deals are falling apart until people get more clarity about the Trump administration's tax-reform plans.

Brickman said the slowdown in construction lending is not a good thing in areas where housing is needed. His agency is exploring this in order to help drive the supply in affordable.

Regarding mortgage originations, Hayward said multifamily is an attractive place for investments; he predicts healthy origination numbers going into 2020.

Brickman said the slowdown in construction lending is not a good thing in areas where housing is needed. His agency is exploring this in order to help drive the supply in affordable.

Instant Insights /

Buzzwords for MF: Income Growth, Affordability

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