Opportunity for Apartments Exists in GSE Bailout

BOSTON-The government bailout of Fannie Mae and Freddie Mac most directly impacts the single-family housing and mortgage industry. However, multifamily also stands to benefit from the move, maintains Gleb Nechayev, a senior economist with CBRE Torto Wheaton Research.

The rescue by the Treasury of the mortgage giants will likely lessen the blow of the housing market crash and give a shot in the arm to skeptic investors. And so far, says Nechayev, things look good; interest rates on both single-family and multifamily mortgages are on the decline. Yet with an election looming and the Fed’s decision being so recent, the long-term impact is unclear. Whatever the outcome, the policymakers and strategists must keep multifamily in mind when implementing their plan, maintains the locally based executive.

Apartments comprise roughly 25% of all housing units in the US, as well as a quarter of all commercial/multifamily mortgage debt outstanding. Through their portfolios and mortgage pools, the GSEs account for 35% of the total multifamily debt outstanding, more than $300 billion. Comparatively speaking, the next-largest holders of multifamily debt, commercial banks and securitized issues, respectively hold 20% and 14% of all outstanding loans. Since the credit crunch sunk in last year, the share of multifamily financing that came from the GSEs has risen to about 70%. “In fact, availability of debt capital for institutional multi-housing investments through GSEs is one of the factors contributing to more favorable asset pricing in this sector as compared to commercial,” points out Nechayev. “Without the GSEs, multifamily cap rates would be higher than they are.”

Single-family financing still accounts for 95% of Fannie Mae and Freddie Mac’s business, but even that has an impact on apartments because they help to make homeownership an affordable option for households, siphoning out renters from the market. And because they provide construction financing as well, the GSEs, says Nechayev, are going to have to walk a fine line between helping keep the housing market in check while maintaining a steady environment for apartments.

The good news is that apartment vacancies are at their historical average and property prices continue to rise, unlike in the single-family home market, which is seeing vacancies skyrocket to twice its historical average and prices plummet. Even more telling is that multifamily loan delinquency rates are 100 times lower than the 6.4% midyear rate for mortgages for residences with one to four units.

Those factors will be examined more closely when the time comes to analyze the GSEs’ role for the two sides of the housing market, says the executive. “Every crisis presents an opportunity to learn from past mistakes and create positive change,” notes Nechayev. “The GSEs’ impact on the multifamily market and investment fundamentals is huge. GSEs or their successor could benefit themselves and the public by at least maintaining and potentially expanding their multifamily focus for next year and beyond. If properly implemented, it could lead to a positive change in which we as a public would not only bear all the risks, but also reap a decent return on this long-term investment.”