Borrowers still have lots of choices when securing permanent financing for apartment properties, particularly from Fannie Mae and Freddie Mac.
“There is overall good liquidity in the mortgage markets,” says Mitchell Kiffe, senior managing director and co-head of national production with CBRE Capital Markets. “Both government-sponsored entities are off to a strong start to 2017. Right now they are very active.”
Interest rates have paused after rising quickly in late 2016. And agency lenders have reported a very busy beginning to 2017.
“Multifamily is still one of the best investments. There is an abundance of capital,” says Eric Tupler, senior managing director and co-head of the Denver office with capital services provider
HFF. “We will need a significant interest rate increase to really move the needle on capitalization rates.”
Busy start to 2017 for Fannie and Freddie
Both Fannie Mae and Freddie Mac have announced that they each expect to fund $55 billion to $60 billion apiece in multifamily loans in 2017, about equal to the amount they lent in 2016.
That includes the $36.5 billion each in conventional apartments loans that Fannie Mae and Freddie Mac are allowed to fund by the federal conservator with authority over them. Fannie and Freddie’s expectations for 2017 also include loans for affordable or sustainably developed apartment properties, which are not included in the caps. “They are getting a lot of lift from their green programs and uncapped business,” says Kiffe.
In January alone, lenders funded $9.3 billion in loans through Fannie Mae programs. That’s up from $5.7 billion last year. However, for now industry experts have not expressed concern the agencies will hit the limits set by their conservator and lose the ability to fund more loans before the end of the year. “Right now it’s not an issue,” says Kiffe.
Interest rates ease in early 2017
For a minute there it seemed like long-term interest rates would rise quickly this year. Right after the Presidential election in November, the yield on 10-year U.S. Treasury bonds rose to a high of around 2.5 percent, up from roughly 1.75 percent in October. Since then, the benchmark yield has dropped back down to around 2.3 percent.
The “all-in” interest rates that borrowers pay have dropped even further and Fannie Mae and Freddie Mac cut their “credit spreads,” which is the difference between the all-in rate and the benchmark bond yield. “Credit spreads have come in probably 20 basis points from the end of the year,” says Kiffe. “Spread have come in even more for loans to properties like affordable housing.”
Higher interest rates would mean smaller loans for many Fannie Mae and Freddie Mac borrowers. Agency lenders still technically offer loans that cover up to 80 percent of the appraised value of a property. But in many core real estate markets, appraised values are high. Fannie Mae and Freddie Mac still demand that the income for an apartment property be at least 1.20x the size of the loan payments. That means that agencies are willing to lend significantly less than an investor will have to pay for an apartment building.
“Given where cap rates are, it’s impossible to make an 80 percent loan in major markets like New York City,” says Kiffe. “Fannie Mae and Freddie Mac loans only cover 60 percent to 65 percent loan-to-value ratios in a lot of those markets.”
Even a middling capitalization rate (for this market) can affect the size of a loan. “A cap rate of about 5.25 percent is the breaking point today, where you are not getting full leverage,” says Tupler.
That makes life company lenders especially competitive in top markets. They typically offer lower leverage loans that cover only 60 percent to 65 percent of the value of a property, but in top markets that’s not so different than what agency lenders can provide.
“The GSEs have not been winning a lot of that business,” says Kiffe. “They are more middle market—where people feel they should be.”