While strong apartment fundamentals and solid industry performance have attracted massive capital to the sector during the past few years, some industry executives are beginning to see capital flows into the sector shift as financing sources get a little choosier about their investments in apartments.
A number of industry executives described the financing market as “full,” to the extent that many equity and debt providers have filled their allocations. This is creating some capital constraints that executives expect will ease once some of the apartment communities currently in the works are completed and the loans are paid off.
In the meantime, capital sources still looking to deploy dollars are having a more difficult time finding good deals, given the influx of new supply, rising costs and the threat of rising interest rates and their potential influence on cap rates. Consequently, some financing sources are now targeting value-add opportunities and looking more closely at deals in secondary markets.
This situation, where there is a lot of capital interested in the multifamily space, but in many cases it’s already spoken for, raises the question of capacity and the role the government-backed Fannie Mae and Freddie Mac should have in the market going forward.
Some in the industry would argue that the government-sponsored enterprises (GSEs) are actually crowding out private capital returning to the market. However, others question whether commercial banks, life companies and the CMBS market can fill the void of the GSEs if Congress moves to eliminate them or significantly pare them back.
As Bob DeWitt, vice chairman, president and CEO of GID, pointed out, there’s an estimated $80 billion in multifamily debt that is going to mature annually over the next four years. However, with the new caps on lending volumes at the GSEs, Fannie and Freddie will only be able to provide for approximately $58 billion annually. “Will there be ample capital through all parts of the economic cycle?” DeWitt asked.
Seth Martin, a managing director with Pritzker Realty Group, argued that in a post-GSE world, the life companies would move to pick up the A assets, and commercial banks would pick up the B assets. Financing costs would increase for borrowers, but private capital could increase capacity, he said. However, the caveat is that because of the way private capital works, financing would remain difficult for certain product types and geographic markets.
“The real losers are tertiary assets across the board,” he said.
David Jacobs, partner and CFO of E2M Partners LLC, added, “The good news is that despite what our Congress would like to do, they can’t make the GSEs go away in a hurry. ... But it puts us in a position to entice the private sources to come back in. Looking out over the years 2014, 2015 and 2016, there isn’t enough debt available between maturities and new debt.”
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