The multifamily market’s strong fundamentals continue to attract a wide variety of capital sources even as rumblings of temporary supply issues in select markets are surfacing.
“Look right now at pretty much every lender group, and they want to do more multifamily than they are able to do,” said Jamie Woodwell, vice president of commercial real estate research at the Mortgage Bankers Association, during a panel discussion at the 2014 NMHC Research Forum.
Given this demand for multifamily lending, the major capital groups are targeting specific segments of the market. When comparing dollar lending volume, number of loans and average loan amount, some capital sources such as life insurance companies and Freddie Mac tend to make fewer loans but for larger amounts whereas other sources such as banks and the Federal Housing Agency (FHA) typically make more loans but for smaller amounts.
“A lot of smaller property financing is going to a place like a bank, where they have a more varied lending platform that involves guarantees and FICO scores versus the bigger properties that go to a dedicated multifamily lender with rigorous underwriting platforms, where they’d be looking for the income stream as collateral,” Woodwell explained.
Similarly, mortgage debt terms continue to vary on property size, with much of the longer term debt resting with larger properties.
With such an availability of capital sources, apartment researchers debated whether the commercial mortgage-backed securities (CMBS) market could make a noteworthy comeback following a severe retreat from the market during the economic downturn.
“It’s possible that we’re not going to see a [CMBS] recovery anywhere near where it needs to be as long as the structure of the product stays the same,” said NMHC Chief Economist and Senior Vice President of Research Mark Obrinsky, pointing to the complicated packaging and limited transparency of the CMBS structure.
However, Woodwell argued that CMBS’s slow resurgence was less about a lack of investor interest in the lending platform and more about the competition in the space.
“Last year we had $80 billion of CMBS issuance, which is a solid number. Estimates were that it would get to $100 billion this year, which is more like 2005 numbers,” he said. “CMBS is less constrained by the number of investors and more constrained by the availability of product. Spreads are wider, so investors are getting paid better, and absolute returns on CMBS are much lower today than they were in 2007. There’s a lot of appetite in CMBS, but given the appetite from life companies, banks, etc., the question is where are they going to compete?”
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