Multifamily was undoubtedly at the top of the list of most favored asset class among lenders in 2015 due to low cap rates, significant capital, increasing rents and a growing investor pool.
Illinois Real Estate Journal recently spoke with Kyle Peterson, vice president at Walker & Dunlop‘s Chicago office, about multifamily financing in today’s market and the challenges investors should be aware of.
Peterson, who has nine years of experience working in the multifamily financing of acquisitions, rehabilitations, and new construction of affordable and market rate properties, also shares what’s new with GSE’s and debt when it comes to affordable and workforce housing developments.
Illinois Real Estate Journal: What’s new in multifamily finance?
Kyle Peterson: The Federal Housing Finance Agency (FHFA) recently decided to increase Fannie Mae and Freddie Mac’s (the GSEs) lending caps to $31 billion each for 2016. Affordable housing—defined as having rents no greater than 60 percent of the AMI—projects from five to fifty units, senior housing, and manufactured housing are exempt from these caps.
While many were hoping these caps and/or affordability thresholds would expand from 60 percent to 80 percent of area median income (AMI), the FHFA is open to revisions through a quarterly review process. Expanding these limits could alleviate some of the volatility experienced earlier in the year when the GSEs’ widened interest rate spreads and tightened credit to prevent exceeding their caps.
For a period of time following the recession, the GSEs were restricted by the FHFA from releasing new loan products. The GSEs’ have made strides in providing new debt products for affordable housing such as Freddie Mac’s Tax Exempt Loan program, permanent loans for newly constructed properties still in lease-up, and small loans in the $1 to $5 million range.
IREJ: What challenges are investors facing these days?
Peterson: Choosing the right debt strategy can be a daunting task, especially when the talk of rising interest rates is increasing. During the Great Recession, Fannie Mae, Freddie Mac and HUD were often the only games in town.
These days, debt sources are plentiful with CMBS, life companies, banks and other structured finance firms all eager to place capital. For a period of time earlier in the year, CMBS spreads uncharacteristically compressed inside of the GSEs. Understanding the intricacies of the various lending sources while staying informed of constant changes can be critical to securing the best pricing and terms for your deal.
As the Federal Reserve seeks to normalize interest rates, U.S. Treasuries and investor spreads will continue to be sensitive. The Fed’s indecisiveness has kept the market on a roller coaster that most investors want to get off of. Navigating these waters can be tricky and borrowers should explore locking in interest rates early in the deal cycle. For a modest increase in rate, the GSEs’ offer the ability to rate lock six months or more prior to closing. This strategy can alleviate some stress of rising rates while providing additional time for costly prepayment penalties to burn off.
IREJ: How has this changed overtime?
Peterson: Securing a multifamily loan has become moderately easier. There is an abundance of capital in the market providing borrowers with an array of highly competitive options. The real difficulty is identifying and winning economically viable opportunities on the buy side. Cap rates have remained extremely low while the investor pool continues to expand globally. Fierce competition for new deals has also boosted values to new peaks. It has become increasingly difficult for investors to hit their return metrics and will not likely get any easier in 2016.
IREJ: What would you say is one major takeaway from 2015?
Peterson: The GSEs’ are strongly committed to increasing the amount of debt available to affordable and workforce (defined as having rents no greater than 80 percent of the AMI) housing developments. Properties do not need to have a land use restriction or a Section 8 contract to be deemed “affordable.”
Borrowers should be checking with their GSE lenders to determine if the rents being charged at the property are at or below 60 percent or 80 percent of the area median income. They are often surprised to learn that their deal qualifies as an affordable or workforce housing project. The GSE’s have been willing to sharpen their pencils to win additional business with these types of properties.