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The housing market has found stability in a time of crisis because of the interventions in the CARES Act stimulus, unemployment benefits, and eviction moratoriums.

The cap rates for small multifamily properties barely budged between the first and second quarters of 2020, according to a new report by Chandan Economics and Arbor Realty Trust.

Cap rates narrowed by 5 bps in the second quarter, landing at 5.8%, explained the article, which was published on lender Arbor Realty Trust’s website.

“In the first quarter, cap rates widened by 21 bps, and there was some concern that they would further inch up as the economic downturn continued. However, small multifamily cap rates held steady due to a pricing tug-of-war,” said the article.

Cap rates are influenced both by falling risk-free interest rates, and by operational risks, it explained.

“When both phenomena happen at the same time, the net result is cap rate stability,” said the article.

Chandon examined the difference between cap rates and Treasury yields to estimate what the risk premium is in small multifamily properties. Although the spread was the highest level on record in the second quarter, when you compare it to the first quarter, it barely budged.

The article said the housing market has found stability in a time of crisis because of the interventions in the CARES Act stimulus, unemployment benefits, and eviction moratoriums. But there are repeated debate about how resilient property cash flows will be when the protective measures expire.

For example, one survey in mid-July said that 39% of renters who earn less than $75,000 per year had no confidence or slight confidence that they would be able to pay their rent in August, the article said. That rate was 5% higher than a survey in the middle of June.

In higher income brackets, there is less concern about the ability to pay rent.

“Small multifamily renters tend to earn less than their large multifamily neighbors, increasing the concern for rent collections with this asset class,” said the article. “Simultaneously, small multifamily renters are comparatively less transient and less likely to transition into homeownership over the medium-term. With COVID-19 causing many young households to reconsider their housing location preferences, the small multifamily subsector may prove more resilient in re-leasing and maintaining stable occupancies over the medium term.”

The article warned that because there are so many moving parts, there will be an ongoing discussion about how the small multifamily market deals with the risks, compared with the rest of the industry.

 

Source: Globe St Angela Morris | September 08, 2020, at 05:43 AM

The two government-sponsored enterprises are on track to match 2019 origination volumes.

Freddie Mac and Fannie Mae are on track to lend nearly as many dollars to apartment properties in 2020 as they did in 2019. They have even loosened rules created in the early months of the COVID-19 crisis that required new multifamily borrowers keep enough reserves on hand to ensure they could make loan payments for as long as 18 months.

“These guys are going to do everything they can to backstop the market,” says Richard Katzenstein, senior vice president and national director of Marcus & Millichap Capital Corporation, based in New York City. “They are looking to put out as much capital as they can.”

In the first months of the crisis, Freddie Mac and Fannie Mae asked new borrowers to reserve enough money to pay the debt service on their loans for between six and -18 months, including both payments of principal and interest. Those reserve requirements are now often waived for new loans that are not as large as the maximum the agencies allow.

Overall Freddie Mac and Fannie Mae accounted for about $140 billion in multifamily lending activity, about 38 percent of the $364.4 billion of all multifamily lending, according to the Mortgage Bankers Association. And while lending for commercial and multifamily properties were dropped 48 percent in the second quarter compared to a year ago, loans backed by Fannie Mae or Freddie Mac only were down 5 percent year over year. 

“Once you go up to the maximum proceeds—80 percent of the value of the property—then they want the reserves,” says Katzenstein.

Freddie Mac and Fannie Mae lenders have not added other requirements on multifamily borrowers. In contrast, for homeowners, they have added a 50 basis point fee on new home loans that refinance existing mortgages that are delivered to the GSEs as of December 1, 2020. The fee will help cover likely losses to the portfolio of home loans in difficult economic times to come.

“There is nothing like that on the multifamily side,” says Dave Borsos for the National Multifamily Housing Council (NMHC).

On the volume side, both government-sponsored enterprises are on track to match 2019 origination volumes. That’s a stark contrast to many other parts of the commercial real estate finance and investment world where there have been steep drops in activity year-over-year. It also comes amid the  FHFA continuing to lay the groundwork for the agencies’ exits from conservatorship.

“The industry entered the current recession on solid footing and is well-positioned to absorb the impacts of the recession due to substantial growth over the past several years,” says Steve Guggenmos, vice president of Multifamily Research and Modeling at Freddie Mac.

Other types of lenders, including banks, life companies, conduit lenders, and others, are expected to make 20 percent to 40 percent fewer loans in 2020 compared to the year before, according to Freddie Mac.

“While we anticipate the total multifamily volume [from lenders of all types] to decrease in 2020, Freddie Mac is supporting lending liquidity as other market participants moved to the sidelines,” says Guggenmos. Even though relatively few borrowers are now seeking financing to buy apartment properties, Freddie Mac and Fannie Mae are replacing much of the acquisition financing they usually provide with refinanced loans to apartment properties.

“Interest rates are historically low,” adds Borsos. “Freddie Mac and Fannie Mae are still very active in the marketplace.”

Freddie Mac offers 10-year loans that cover 80 percent of the value of an apartment property to strong loan sponsors with interest rates fixed at 230 to 245 basis points over the yield on U.S. Treasury bonds, with a floor on Treasury bond yields of 50 basis points, according to Marcus & Millichap.

Other types of lenders also offer competitive interest rates but at lower levels of leverage. “Interest rates offered by banks are competitive. But they are dialing back the loan-to-value (LTV) ratios… maybe not 70 percent, maybe 60 percent of 65 percent,” says Katzenstein

So far, the economic crisis has not caused measurable damage to the multifamily loans held by Freddie Mac and Fannie Mae. The number of their borrowers who have missed loan payments and asked for forbearance has not grown much, despite the economic chaos caused by coronavirus, according to NMHC’s analysis of data from the government-sponsored entities. “There is some uptick in the beginning, but it’s been level from then on,” says Borsos.

Of the borrowers that have asked for forbearance on their loans, the vast majority (75 percent) are small loans of just a few million dollars each. “These may be mom and pop investors in apartment buildings,” says Borsos. “Those may be the ones that are struggling.”

 

Source: National Real Estate Investor Bendix Anderson | Aug 26, 2020

 

As has been the case for much of the recent crisis,  borrowers are continuing to try to capitalize on favorable rates to refinance apartment properties—that is, when they can find lenders willing to close deals.

Long term interest rates—like the yield on 10-year Treasury bonds—fell below 1 percent at the start of the economic crisis caused by the spread of the coronavirus in March 2020 and stayed below 1 percent well into mid-summer.

Freddie Mac and Fannie Mae lenders have proven to be consistently willing to make loans to qualified apartment properties with interest rates fixed at a spread over these historically low-interest rates. Other types of lenders, including many banks and life insurance companies, have been more cautious.

Long-term interest rates fall to new historic lows

On July 28, the benchmark yield on 10-year U.S. Treasury bonds was 0.58 percent. It has hovered around 0.6 percent and 0.7 percent for several months. In comparison, in the months before the crisis, the benchmark yield hovered between 1.5 percent and 2 percent.

“The outlook is for a continuation of low rates through the end of the year,” says Tony Solomon, senior vice president, and national director of Marcus & Millichap Capital Corp. “Could rates fall even lower?  Sure, maybe a little, but they are very low now and we know that there is an ‘open window’ of various capital sources for the right asset and borrower.”

However, many lenders have become much more selective about the loans they are willing to make—even though the number of potential borrowers has shrunk sharply in the crisis caused by the COVID-19 pandemic. Relatively few investors are eager to borrow money to buy apartment properties at the high prices sellers still expect. And though low-interest rates create a huge motive to refinance, many properties still have years left before they can prepay their old loans without expensive defeasance or yield maintenance arrangements.

“Most lenders really heightened their inspection of an applicant’s creditworthiness and liquidity,” says Solomon. Those lenders that did stay in the market also increased their ‘insurance’ by requiring various escrowed reserves of approximately six to eighteen months of principal, interest, property taxes, and insurance, many requiring add equity to cover those reserves.”

Agencies still rule

Lenders of all types are likely to make fewer loans to apartment properties in 2020 than they did the year before—but for  Freddie Mac and Fannie Mae lenders, the decline in lending volume is likely to be less dramatic.

“Freddie Mac and Fannie Mae have been very supportive of the market,” says Mitchell Kiffe, senior managing director and co-head of national production for debt and structured finance for CBRE Capital Markets, based in McLean, Va. That’s partly because of Freddie Mac and Fannie Mae’s mission to provide capital at all stages of the real estate cycle. “They are designed to be countercyclical.”

Apartment borrowers still get the lowest interest rates on permanent loans from these agency lenders. “We have seen some rates from the agencies over the past few weeks for well-located, well sponsored multifamily properties even dip into the sub-3 percent range,” says M&M’s Solomon.

In select cases for low-leverage loans,  Fannie Mae and Freddie Mac are both offering interest rates as low as 2.5 percent. They set higher interest rates of 2.75 percent to 3.25 percent for loans that cover more of the value of a property, according to CBRE.

“If you are a long-term holder, that is pretty hard to decline, even if you have to pay a pre-payment penalty,” says Dave Borsos, vice president of capital markets for the National Multifamily Housing Council.

Life companies struggle to make deals

These low-interest rates are a burden to life insurance companies. “The life companies are back on a conservative basis,” says Kiffe. “However, they cannot generally bear loans at those very low-interest rates… 2.75 percent is about as low a coupon rates as they can offer.”

Life companies have also developed a habit of lending to apartment properties. They made more permanent loans to multifamily properties than any other type of commercial real estate, over the past few years according to the American Council of Life Insurers. They keep returning to apartments, even though they can get much higher interest rates by making loans to other kinds of commercial real estate, like grocery-anchored shopping centers.

Banks fall behind

Banks generally prefer to make loans with shorter terms and floating rates. Some make longer-term loans to apartment properties—but even that has become less common in the crisis caused by the coronavirus.

“Big banks, by and large, are not making loans to apartment properties,” says Kiffe. “They are only making capital available to their best customers.” That’s partly because of capital requirements that force them to keep billions of dollars in reserves as the economy weakens, to cover risks including loans made under the federal stimulus program.

“Local and regional banks are still lending, though spreads have widened and the leverage is down,” says Kiffe.

Source: National Real Estate Investor Bendix Anderson | Jul 29, 2020


About Marcus & Millichap Capital Corp.

Marcus & Millichap Capital Corporation (MMCC) is a leading source of real estate capital nationally. In 2019, the firm sourced and closed $7.8 billion in commercial debt and equity structures through 1,944 capital markets transactions across the U.S.

Our team of experienced professionals provides financing for a full range of property types and loan amounts. We position each property optimally to source capital and leverage state-of-the-art systems to execute with maximum reliability.

Refinancing

Whether you are seeking to pull cash out of an asset, reduce monthly payments, or secure better loan terms, our capital sources can provide the optimal refinancing package in both loan terms and loan proceeds. By aggressively sourcing funds through our network of different types of lending institutions, we are able to obtain the best capital fit to meet clients’ objectives.

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Marcus and Millichap | April 2 Live Webcast
Real Estate Investment and Financing:
Facts, Myths and Navigating Forward
You are invited to a live one-hour webcast covering:
  • Most Up-to-Date Economic Assessment
  • Government Initiatives and Potential Impact
  • State of the Real Estate Financing and Transaction Markets
  • Challenges and Opportunities by Property Type
Thursday, April 2, 2020
4:00 p.m. Eastern/1:00 p.m. Pacific

VIEW RECORDED REPLAY

Host:

HESSAM NADJI

President and Chief Executive Officer

 
Panelists:

SCOTT M. HOLMES

National Director, Retail 

 
 

ALAN L. PONTIUS

National Director, Office & Industrial

 

JOHN S. SEBREE

National Director, Multifamily 

 

JOHN CHANG

National Director, Research Services