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US Multifamily Originations to Decline 20 to 41 Percent in 2020, Says Freddie Mac

KeyBank Real Estate Capital recently provided a $64 million Freddie Mac loan for the acquisition of The Park on Windy Hill in Marietta, Ga. Freddie Mac is predicting its loan originations to stay flat compared to 2019 but for overall multifamily lending to decline drastically due to economic setbacks stemming from the COVID-19 pandemic.

WASHINGTON, D.C. — In its midyear multifamily outlook report, Freddie Mac predicts U.S. multifamily loan originations will drop severely for all of 2020 due to the outbreak of COVID-19 and the big blow the virus has dealt the U.S. economy. The gross domestic product from April to June plunged 32.9 percent on an annualized basis, according to the U.S. Commerce Department.

The government-sponsored enterprise (GSE) is projecting that loan volume will decrease 20 to 41 percent across the multifamily sector this year compared with the total dollar amount of loans closed by lenders in 2019, which Freddie Mac estimates was $374 billion. Heading into this year, Freddie Mac expected that loan originations would increase 5 percent in 2020 to $390 billion.

Depending on the overall strength of the U.S. recovery and the further spread of COVID-19, Freddie Mac outlined two scenarios for how the year will play out. The more optimistic scenario calls for the unemployment rate to fall just below 8 percent by the end of the year.

The U.S. unemployment rate, which stood at 11.1 percent at the end of June, will be updated Friday when the Department of Labor releases the nonfarm payroll employment report for July.

The upside scenario, if realized, would result in a 20 percent decline in multifamily mortgage originations in 2020 to $299.2 billion before rebounding to $375 billion in 2021.

In the report’s downside scenario, the national economy would remain in a recession through 2021, which would result in multifamily mortgage originations declining 41 percent this year and by another 5 percent in 2021. Even in this worst-case scenario, the decline in multifamily loans does not sink to the levels experienced during the Great Recession, according to Freddie Mac.

The downside scenario is similar to the prediction that the Mortgage Bankers Association (MBA) posted in its mid-July report. The Washington, D.C.-based organization expects total multifamily loan originations for all of 2020 to drop by 40 percent on a year-over-year basis.

Multifamily investment sales activity is certainly down compared with this time last year, which has a direct impact on demand for acquisition loans. Sales of apartment communities nationally totaled $13.9 billion in the second quarter, a 70 percent drop from second-quarter 2019, according to Real Capital Analytics. (RCA tracks property and portfolio sales totaling $2.5 million and above.)

Freddie Mac indicated in its report that the drop in investment sales activity and loan originations is not indicative of any property level performance, citing healthy rent collections for the multifamily sector despite massive unemployment. According to the National Multifamily Housing Council’s Rent Payment Tracker, which charts rent collections from 11.1 million professionally managed apartment residences in the country, renters have been able to successfully pay their rent. As of July 20, about 91.3 of apartment households paid their July rent, which is a 2.1 percent decline from this point in the month in 2019.

As for Freddie Mac’s business outlook, the GSE expects its 2020 volume to remain relatively flat year over year. The agency and its network of Optigo lenders produced $78.4 billion in multifamily mortgages in 2019, which accounts for about 21 percent of the overall multifamily loan originations market. Additionally, the agency’s production in April and May ($11.3 billion combined) outstripped its performance in the first quarter ($10 billion).

“Our volume trends are not reflective of the overall market trends since our role as a GSE is to provide liquidity, especially during a time of market stress and as other market participants are sidelined during this uncertainty,” according to the report.

— John Nelson

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