Records were meant to be broken. That’s a phrase commercial lenders have become fairly familiar with over the past few years.
Multifamily lending, in particular, has enjoyed a good run. In the fourth quarter of 2018, the Mortgage Bankers Association released the MBA Annual Report on Multifamily Lending. According to the report, strong market conditions helped fuel a 6 percent increase in multifamily lending in 2017. Lenders provided a record high of $285 billion in new mortgages for apartment buildings with five or more units.
Jamie Woodwell, vice president of commercial real estate research for MBA, cited a few reasons for this uptick in activity.
“The multifamily lending market in 2017 benefited from improving fundamentals, rising property values and low interest rates,” he says. “The result was larger loan sizes and record levels of overall borrowing and lending…Demand came from borrowers and lenders of all sizes, with loan amounts ranging from thousands of dollars to hundreds of millions.”
This breakneck pace continued last year as low unemployment, job growth and overall economic strength gave investors and lenders confidence in the market. Freddie Mac had its best year ever in terms of multifamily production in 2018. The government-sponsored enterprise (GSE) closed a record $77.5 billion in loan purchase and guarantee volume and an additional $500 million in Low-Income Housing Tax Credit (LIHTC) equity investments.
Debby Jenkins, executive vice president and head of Freddie Mac Multifamily, says the company is able to maintain the title of the nation’s multifamily housing finance leader due to its willingness to change and innovate.
Debby Jenkins, Freddie Mac
“In the last decade, we have fundamentally transformed into a company that thrives on innovation,” she asserts. “We’re working to harness that innovation every day — to create and enhance offerings to meet customers’ diverse needs, to lower our cost of capital and protect taxpayers with innovative securities, and to lead the multifamily industry into its next great chapter.”
A commitment to change and an appreciation for innovation are sound strategies for anyone in today’s commercial real estate market. After all, tastes are changing as buyers turn to renters, suburban dwellers move to urban cores, and Millennials and Baby Boomers appreciate the flexibility apartment living can bring. This, of course, is paired with a tech evolution that has led to sophisticated, resort-like amenities in many multifamily dwellings, as well as an increase in labor and construction costs.
The majority of banks seem to have gotten the picture as well, with many companies throughout the United States reporting significant increases in lending activity in 2018. SB Financial Group experienced a 25.1 percent increase in commercial loans last year, according to the company’s fourth-quarter and year-end 2018 earnings report.
“Loan volumes have been strong for us all year,” says Mark A. Klein, chairman, president and CEO of SB Financial. “Despite rising rates and inventory pressure…our full-year production level of $342 million is the second-highest in our history.”
Staying Active
Other earnings reports looked similar, with commercial real estate loan increases experienced by National Bank Holdings (33.5 percent), Webster Financial Corporation (11.6 percent), Community Bankers Trust Corporation/Essex Bank (10.8 percent), Associated Banc-Corp (10 percent) and Wellesley Bancorp (6.2 percent), among others.
Fannie Mae provided more than $65 billion in financing to support the multifamily market in 2018 via its Delegated Underwriting and Servicing (DUS) program. For this GSE, innovation came in the form of social change as the company focused on sustainability and affordability efforts.
Fannie Mae was the largest issuer of Green Bonds in the world in 2018, with more than $20 billion in Green MBS backed by either green-certified properties or properties targeting a reduction in energy or water consumption. The company’s Green Financing portfolio inflated to more than $50 billion in 2018, driven by $20 billion in Green Financing. Fannie Mae also made LIHTC equity investment commitments toward the Federal Housing Finance Agency’s (FHFA) $500 million volume cap by deploying equity to rural and other underserved U.S. housing markets. The GSE led the affordable market with overall production of $7.4 billion in 2018, an increase of 9 percent from 2017.
Jeffery Hayward, Fannie Mae
“For more than 30 years, the DUS platform has brought stability to the multifamily market,” says Jeffery Hayward, executive vice president of multifamily for Fannie Mae. “Our commitment to serving our customers remains our top priority. Our lender partnerships are also propelling Fannie Mae to be part of a global movement to transform rental housing to be healthier for residents and to help reduce energy and water consumption at the properties we finance.”
To be sure, a new year has brought about some uncertainty. Although the partial government shutdown that lasted 35 days abruptly came to an end in late January, the question remains whether there could be a second shutdown in a matter of weeks. Then there are issues surrounding interest rates, the stock market, an abnormally long real estate cycle, and the ever-nagging thought that what goes up must come down. Though many forecasters are hesitant to say the pace of the recent past will continue, many are optimistic that the market will continue its upward trajectory — albeit at a slower, steadier pace.
MBA’s Commercial Real Estate Funding (CREF) Outlook Survey 2019 seems to second this. Supply and demand is expected to be strong for commercial loans in 2019, according to the survey. The majority of lender respondents believe the market will grow this year, though loan risks are expected to edge higher as returns hold steady.
— By Nellie Day