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Capital is here now, but will info sharing be the future?

While abundant capital flows to the apartment market, a new industry data source promises to smooth the bumps that may lie ahead.

Persistence paid off for Matthew Slepin. As executive director of the Multifamily Housing Institute (MHI) and after spending the past three years organizing and trying to bring numerous apartment industry-related factions together, he is about to realize his dream of launching a national apartment database that will increase the sector's efficiency and have wider application to other property segments.

Called, the online system will provide a single-source of information on more than 3.4 million apartment units and 29,000 properties nationwide. Aggregated performance numbers on national, regional and local rents, occupancies and leasing levels will be available to online users for a fee.

The system's first test is slated for a Labor Day intranet launch, followed by a full move to the Internet around Jan. 1, 1998.

On your mark, get set ... The Multifamily Housing Institute is a non-profit organization comprised of 85 leading organizations active in the multifamily housing business. Its genesis was a 1990 task force in Washington, D.C., on the financing of affordable housing. The task force recommended the formation of MHI to "pursue the recommendations of this Task Force and to become a permanent protector and facilitator for the multifamily housing finance system and for affordable housing in particular."

Shortly after that report, Congress passed legislation to establish a "National Interagency Task Force on Multifamily Housing," which was to create a "multifamily housing financial data project in order to improve the availability and efficiency of financing for multifamily" housing. But funding was in short supply and the MHI was officially incorporated in summer 1993. Matt Slepin was hired as executive director in 1994.

One of the original members of the task force was Thomas White, senior vice president of Fannie Mae. "We needed to conceptualize a way to keep going on some of these issues. I suggested in a committee report that I did that we form a group coming out of it to try to work on several things, only one of which we've been able to spend a lot of time on so far, trying to provide both a database and trying to provide some standards or consensus around how one could also work on affordable housing," says White.

"There were also some other issues occurring in the general commercial lending arena that were trying to build toward certain standards where maybe the Multifamily Housing Institute could interface with these groups to make sure that anything that's peculiar to multifamily was appropriately addressed and recognized. So the task force did accept that recommendation, and so we started the Institute, and it was of course volunteer at first," says White. "I was the first president before Georgia (Murray), and we put together a group, started to hold meetings, put the money together, hired Matt and here we are."

Though the capital markets are vastly different today, with oversupply the rule and undersupply the exception, White sees this as the ideal time to bring efficiency to the market. "The time to fireproof your house isn't when it's burning, it's to do it before the fire hits. These are cycles. There will be another cycle where information and systems and standards will be all the more important in terms of having capital available for the industry. Preventing the next crisis is contained right here."

"Let me give you an example," he adds. "During the capital shortage period we had recently there was never a day when there wasn't an abundance of capital for single-family mortgages. We had set up a global secondary market system that never hiccuped. It really was amazing. There is no reason why we can't do it for multifamily. That's what this is really all about."

Recently MHI moved to formalize its board of directors, to which 15 members were elected on May 16. A nine-member executive committee was also appointed.

Last October, MHI formalized agreements with the Urban Land Institute, Fannie Mae, Freddie Mac and the U.S. Department of Housing and Urban Development (HUD) to contribute funding and data for the creation of MHI's offices are now housed within ULI's headquarters in Washington, D.C.

It is evident that much investment, of time and dollars, by a number of prestigious organizations has been pumped into MHI to make it a success. An original investment of $3 million was made in the system, HUD contributed $1.5 million, ULI $350,000, Fannie Mae and Freddie Mac $100,000 each, and $1 million by MHI members to design, test its feasibility and identify data contributors. Some of the original funding came in September 1995 from a $50,000 challenge grant to hire Midland Loan Services to construct the system. Prior to that, Price Waterhouse performed a feasibility study for the database in 1994.

What industry impact? The bottom line -- what will as a first step in MHI's work mean to the apartment industry?

Slepin sees it integrating nicely into everyday multifamily business. "I hope that in three years will be something that professionals at any level are using," says Slepin.

"We believe that technology is really the key to the future," says White. "It saves incredible amounts of money in originating loans, makes the market more liquid, and we're very much committed to bringing our customers the technology that will enable them to be in the next century profitably."

Really the data is designed to have multiple purposes. By sharing information, the industry comes closer together and becomes more cohesive and less fractionalized. The system can also help to better prepare the industry for the inevitable capital crunch that lies just around the next corner of the never-ending real estate cycle.

Georgia Murray, vice president at Boston Financial and outgoing president of MHI, recognized early on the importance of creating an apartment database for market efficiency.

"It will legitimize multifamily as an asset base. Because you can't get data now because everyone keeps it a little bit differently, you'll be able to see the performance. Therefore, when you have a pecking order of 'capital's scarce again, what can it go into?' It's going to go into either the Street or banks or whoever can say, 'I can quantify this risk,'" she says.

Murray is one who recognizes that the cycles in the multifamily industry are inevitable, and the database could help to lessen the delirious swings in capital availability.

"Now that capital is much more available than it was when we started our young lives four years ago, it's not the same issue that we had four years ago," says Murray. "Now it's a cost-of-capital issue. But those of us who have lived through crunches are very mindful that it could get to be a 'whether' capital, not cost of capital. And because of that, that's what we think the database will do. It will also hopefully, on the affordable housing end, allow people to really take a look at the risk/reward of both affordable and conventional and be able to price it properly."

"I got involved because the thing I always say is 'This train is coming.' The data is going to be collected by someone. I feel very strongly that the industry leaders in any given segment in any part of American industry have to come forward and say 'Here's how our industry can get better.' I do believe that having the data be available is really going to make the industry better. We're going to give better service to our investor clients, and we're going to give better service to the people who live there."

Since the original task force in 1990 was convened for financing affordable housing, it only follows that a melding of conventional multifamily and affordable be part and parcel of MHI's program.

"It's really important for those two sectors that 10 years ago were seen as worlds apart, and are coming together more and more as affordable housing gets more institutionalized and as people begin to see multifamily as an asset class. It's really important to me that as the industry came together that affordable housing wasn't left out," says Murray.

"Part of the mission of the institute to bring those groups together really appealed to me because that's what I believe should happen," says Murray. "The tax credit program more than any other program has made that happen, because of the investor base of the institutional investors which never happened in affordable housing. There is a demand there from the investor base to make data happen, to bring up the professionalism of the whole industry."

As the commercial real estate industry in general continues to consolidate among larger and larger players, the need for more efficient and timely information is critical.

"This (database) will be both part of the consolidation and it will benefit from the consolidation. There will always be a place for the smaller apartment owners, but I think this will be the Dow Jones Industrial Average of apartments," says Murray. "This will be the index that people look to. Whether you are part of it or not, you're going to have to be aware of it, you're going to have to know it. I hope that we continue to be an organization, as we become more a part of ULI."

"The reason we started the database was to promote the dialogue, to have the interthought. That will still be necessary always as we continue this development. My hope is in three years we'll take the database for granted. That it's there, that we've got the indices and then we treat the institute as a platform to really continue the dialogue," says Murray.

Getting past the proprietary They say that information is king, and so it only follows that one of the biggest challenges in setting up the structure was getting apartment owners and managers to unleash their numbers.

"As it proves itself, and as the leaders of the industry provide data, and as the benefits of providing data become clearer to those who aren't the pioneers, then it will be much easier to get people on board. The technology will also get easier," says Slepin.

Besides, it's taken the industry a long time to catch up to the technology curve.

"One thing, when we started the project, it would have been hard three years ago. For people to provide data was a big deal. People had 50 Excel files on their 50 properties instead of one asset management system. So in some ways we were ahead of the industry and we wanted to get there by the time people were ready to provide data," says Slepin.

"The premise is not just helping the capital markets and the effect that it has on the stability of the capital over time, but it also looks down to the level of property management, trading of property," he adds. "If you have feedback loops that are relatively quick to understand how markets are working and the cycles of individual markets plus where your property fits into the cycle in that individual market versus the rest of the country, then you start making decisions a lot better and the bigger owners are doing that now in a way that they didn't do it five years ago. They're changing rents weekly, monthly."

As of now, some of the apartment industry's biggest players -- Insignia Financial, NHP, Trammell Crow Residential, Equity Residential -- have signed up to provide data to the service. But that doesn't mean they will be the only ones.

"There was a sense two or three years ago where the large owners were saying, 'I've got data in 48 states, I've got 75,000 units worth of data in our database. Do I need to have 2 million?' But it is important to see how others are doing it and what's going on," says Murray. "Once we got Insignia and NHP and other large owners, and Fannie Mae and Freddie Mac who obviously have a lot of property, if we're all saying we need each other to be able to benchmark and to do different things, then I think that the folks who aren't as large as the top 50 or whatever are going to say, 'If the top 50 think they need to, then maybe we should do that.'"

Eventually an index or indices will be created from the data collection. "Our goal really is to have third-parties use the data not just internally to do deals better, but also industry-seers can do all kinds of things with it," says Slepin.

As for the involvement of ULI, it has meant more than new offices for MHI. "From my perspective it's been very important. We are a small focused institute, and so it's great to be able to have the infrastructure and everything that ULI provides and it's also a very prestigious organization, plus the fact that they think our mission is correct is sort of the Good Housekeeping seal of approval," says Murray.

Slepin agrees. "I think it's been critical. One, our mission statements line up. We found that the meshing was really easy. Also, I think they saw what we were doing was a potential major future direction for them. It's a wonderful role for ULI and for us to play to help the other groups in our industry, to help the National Multi Housing Council (NMHC), the MBA (Mortgage Bankers Association), NAREIT (National Association of Real Estate Investment Trusts), all those groups. So ULI was the perfect partner for us to do that with."

The state of the industry If's ultimate goal is realized, then new efficiencies will be brought to bear on multifamily capital markets. But right now, lack of capital just isn't a real problem.

"The industry seems to be awash in capital," observes David Queen. The chief underwriter at Arbor National Commercial Mortgage LLC, a Uniondale, N.Y., mortgage lender, says the primary and driving characteristic of the multifamily finance marketplace today, as it has been for the past year, "is an abundance of capital, probably bordering on an oversupply."

Queen is not alone in his assessment. A random survey of lenders working the multifamily sector almost unanimously agree there is too much money in the market, and it is coming from numerous directions. "There is a tremendous amount of capital," says Michael Jameson, vice president of Newark, N.J.-based Prudential Capital Group. "It is not only coming from lenders, but it is also coming from the public markets, particularly through real estate investment trusts."

The first real estate sector to emerge from the deep property recession in the early-1990s, multifamily has continued to stay the course over the past six years with low vacancies and slow but continually improving rental rates. Perhaps it is the stability that continues to attract lenders. Or, the often cited favorable demographics: a population with a high percentage of affluent renters, various baby boom generations staying in apartments and job mobility.

The next five to 10 years will bring the most diverse renter base ever, says Ronald Witten, president of M/PF Research Inc. in Dallas. "There will be more demand for rental housing from all age groups," he says.

Underneath this portrait of idyllic market conditions flows a deep stream of concern. According to a Valuation International Ltd. survey of 35 acquisition officers for pension funds, insurance companies and REITs, "apartments may have had their day." And a look at recent statistics from the National Association of Real Estate Investment Trusts shows that in 1996 returns on apartment REITs were near the bottom of all sectors, a pattern that continues. In March, the seven best performing REIT sectors were industrial, office, self-storage, diversified, hotel, outlet centers and strip centers. Apartments were nowhere to be seen. Despite these warning signs, the growth rate in the net flow of funds to the apartment sector rose at twice the market average in 1996, reports LaSalle Advisors' 1997 Investment Strategy Annual.

In the multifamily sector, every lender is willing to show the money, whether it be for acquisition, refinancing, rehabilitation or new development. In a free-market economy, stability and performance derive from an approximation of a balance in supply and demand. The abundance of capital is roiling the multifamily market.

Capital and Competition Village Green, a Farmington Hills, Mich.-based apartment developer, has five construction projects currently under way. The company encountered no problems finding capital, says David Dean, chief financial officer. For the past few years, Village Green has been teaming up with a union pension fund which has been providing the equity component for joint ventures. Basically, for Village Green the union pension fund provides the equity and in some cases the construction loan or participates in the construction loan. Village Green then finds third-party mortgage money to add debt to the properties.

"There is an abundance of capital right now for multifamily," Dean says. "Life insurance companies, pension funds, conduits -- just a lot of sources with an incredible amount of capital to put into real estate. And they are having a hard time doing it, because there isn't enough product for the amount of money chasing it."

Heller Financial, a Chicago-based lender, supplies capital to the multifamily industry through its core floating-rate debt lending program and fixed-rate debt through its conduit program. In the latter case, the company not only sources and originates loans, but warehouses them as well. Last year, Heller did about $500 million in conduit loans, all of which will be securitized this year.

Nevertheless, John Petrovski, executive vice president and Midwest regional manager at Heller, detects clouds on the horizon. Whether they are storm clouds has yet to be seen. On one hand, Petrovski sees life companies and conduits "chasing spreads down to Treasury plus 140 or even Treasury plus 100" in Class-A apartments, and he says that's one arena where Heller chooses not play as the reward does not fit the company's business plan. On the other hand, Petrovski says the competition could mean the market is actually in balance. "People are not used to seeing a lot of competition on deals. They are not used to losing deals to competition and giving a lot of quotes. Lenders and equity investors just need to say 'no' to some transactions, because they are too aggressive. Lenders need to be prepared to lose some deals to competition."

Ken Bernstein, chief operating officer at New York-based RD Capital Inc., isn't so sanguine. The company owns and manages shopping centers and multifamily units. Its major focus is now with shopping centers. "The general market for attractive investments in multifamily is overpriced, which is due to the number of players and the amount of capital -- there is just too much of it. There is a significant amount of debt available. One can easily find 80% loan to acquisition cost financing -- nonrecourse, nonparticipating 80% financing for apartments."

Is this the kind of financing that got the real estate market in trouble back in the 1980s? Well, not yet. Back in the 1980s, the financing was 100% instead of 80% and on construction costs instead of income in place. However, this doesn't mean there won't be problems if the market makes a sudden downturn.

Parallel Capital Corp., a New York-based commercial lender, spreads its business across a wide variety of the real estate marketplace. Over the past three years, its multifamily business decreased. "Multifamily has become more competitive more quickly because it is more of a commodity business than some of our other general commercial loans," says Robert Schneiderman, executive vice president. The market as a whole is still in balance, Schneiderman says, but there is pressure now in terms of individual transactions being shopped and "pushing the envelope in all ways as far as pricing and underwriting practices are concerned."

Last year, GMAC Commercial Mortgage based in Horsham, Pa., did about $4 billion in loans, of which 15% to 20% were in multifamily. This year, the company expects to do about $5 billion to $6 billion, keeping the same percentage in multifamily. Business has been improving, says Scott Rombach, a vice president of public relations at GMAC Commercial, so much so that multifamily, which used to be part of GMAC's overall residential division, has become a separate strategic business unit.

Banc One Capital Corp. has been another aggressive capital source. It's been a housing and health care lender for the past 12 years but, in 1995, its affilate Banc One Capital Funding Corp. took over the DUS license of Bank Mortgage Corp. That year, Banc One did $80 million of business. In 1996, it performed $300 million of Fannie Mae DUS business, and this year it is targeting $400 million.

"We feel with our bank affiliate network and our name there is no reason we shouldn't be the No. 1 DUS lender in the country," says Ken Bowen, chief underwriter for Banc One Capital Funding Corp. in Columbus, Ohio. Sure the market has gotten increasingly competitive over the past two years, but that should only improve the position of the larger players like Banc One, Bowen suggests, especially because competition for deals is making it tougher and tougher to keep adding fees, so economies of scale make it easier for bigger lenders to stay in the game, particularly when they can bring additional financing components to the closing table, such as investment banking, subordinate debt and tax credit equity.

Spreads "Spreads are tightening considerably," observes Bill Moore, chief executive of Glen Allen, Va.-based Multifamily Capital Markets. When Multifamily Capital came into the market back in 1992, spreads were in the 300 to 325 basis points over Treasury range and now, says Moore, they are in the 180 to 200 range. "What is happening is that there is a feeding frenzy on permanent financing for apartment loans. But what worries me is that every time I've seen money chase deals, you can set your watch that three years later you have an enormous amount of money that has headed south."

Parallel Capital, which primarily lends for acquisitions or refinancing on multifamily, is slowing its program. "It is very busy, and spreads aren't as good," says Schneiderman. "Spreads are consistently below 200, and it would be better to be in other types of commercial than in multifamily." Parallel is not a DUS lender, but those that are can probably hang in the market because of the huge velocity DUS lenders can do -- especially a DUS lender that is also doing conduit business.

Under Fannie Mae DUS, explains Banc One Capital Funding's Bowen, spreads are to a large extent determined by Fannie Mae's guaranteed fees and the lender's servicing fees. That has dropped in the past year. In addition, the conduits have dropped spreads by a comparable amount -- even deeper for some property types because those sectors were high to begin with.

Lower spreads are not necessarily a bad thing. "We've seen loan spreads come down on securitized product," says Patricia Micka, a managing director at Chase Manhattan Bank in New York. "Because of it, we are now better able to compete with the life insurance companies. We are seeing the high quality product. Traditionally, the 'A-' and 'A+' product was originated by life insurance companies, and we never got a shot at it because last year our spreads were much higher." Narrowing spreads aren't a healthy condition for portfolio lenders, but in the securitization world it helps us generate additional loans to round off a pool, Micka says.

What do you do when spreads narrow? There are just two choices, says Arbor's Queen. "Either you price more aggressively, or you underwrite more aggressively." What some conduit lenders have been looking to do is test debt service coverage ratios of 120% rather than the 125%, which has been the industry norm for the last four years. So, the response has been to re-examine underwriting parameters and accept a lesser degree of debt service coverage thereby providing greater proceeds to the borrower.

Interest rates In March, the Federal Reserve raised short-term interest rates a quarter percentage point out of a concern that tight labor markets risk igniting inflationary wage demand and price rises. The Fed policy makers were exercising what they called prudence and a bit of insurance when they raised rates so as to sustain the long-running economic expansion now in its seventh year. Generally, when the Fed raises interest rates, it is not a one shot deal and the expectation remains there will be another rise in 1997.

In regards to capital providers, especially to the multifamily industry, the immediate speculation is that lenders who are already having trouble putting out money will probably narrow spreads even further to get rates down.

Borrowers who need to borrow will still have to do so in the face of rising interest rates. However, if rates get too high then some borrowers will spook. "Interest rates are historically low, however, if rates continue to rise, you may see borrowers who do not have an upcoming maturity hold off," says Chase's Micka. "They'll wait until maturity, or they will wait to see if rates start coming down a little bit. But anyone who needs to refinance is still going to refinance." One change that may occur is for borrowers to seek interest rate protection, they would want to be able to lock their rates in early and not be subject to increasing interest rate movements.

When asked where the multifamily capital market will be heading this year, John Sweazy, president of San Francisco-based TRI Financial Corp., responded by saying, "Ask Mr. Greenspan." In Sweazy's view, if, in a worst case scenario, interest rates on long bonds move no more than 40 basis points, there will be little effect on the market. Any more than that and "deals start to fall apart."

One company keeping a close eye on interest rates is the Federal National Mortgage Association, or Fannie Mae, which boasts the biggest lending program in the country over the past several years, DUS -- Delegating, Underwriting and Servicing. Executions of DUS were something akin to $4.3 billion last year, and the expectations were that it would be about the same.

In fact, assuming that interest rates didn't move this year, White of Fannie Mae speculates 1997 would exceed last year's DUS production. But interest rates have moved and could move again. "There's no question that mortgage loans, whether single-family or multifamily, ours or anybody else's, are sensitive to interest rates," White says. "As you go up the interest rate curve, at a certain point folks just don't want to refinance. They will hold longer."

Bankers Mutual is a Newport Beach, Calif., multifamily lender that works solely in the western states of California, Washington, Oregon and Nevada. Over the last two years, the company did $1.2 billion in loans; this year its goal is $500 million and, through early May, it had funded or locked in $350 million. "Bankers Mutual is optimistic about exceeding its goal for the year," says Bryan Frazier, vice president and production manager at Bankers Mutual.

"With Fannie Mae and Freddie Mac, spreads are as low as 100 basis points, even sub-100 on tier 4 business, which is your 55% loan-to-value threshold," Frazier says. "We've seen further compression this year, and this is the lowest I've seen spreads. I have not seen spreads that narrow before. The spreads are also being brought about by the efficiencies of the secondary market. It's a function of the market today. Insurance companies, conduits have gotten more competitive and so has Fannie Mae and Freddie Mac. What we are hoping doesn't happen is a compromise of good lending practices. We hope that won't be a byproduct of the competition."

A great deal of recent lending products and the generally outstanding loan production over the past couple of years has been driven by a refinancing boom, but all "refi booms" grind to a halt when interest rates get high. "If we see further run ups in interest rates, much more than where we are right now, we are going to see a real slowing in the market. Not just ours, but across the board. At that point, if rates get too high, then you start to see the adjusted-rate mortgage (ARM) products come up," White says. Fannie Mae, which has an ARM product, recently dusted it off and is taking a look to see how it could be improved.

Consolidation Fannie Mae has other issues to deal with in addition to interest rates. Over the past few years, a number of its lenders have been acquired, reconsolidated or merged, especially on the banking side. However, independent mortgage companies have also started to marry up. Last year, Berkshire Mortgage acquired Patrician, and NHP of Washington, D.C., took over cross-town rival Washington Mortgage Financial.

"Generally speaking, we always said we want to have somewhere between 20 to 30 active lenders in our DUS program," says White. "Right now we have about 26, so we are comfortable where we are. We will continue to add as others merge or consolidate." White adds that what really concerns Fannie Mae is making sure it has the right mix of lenders to serve all the markets it is trying to serve.

"The Patrician deal closed in January, and it was our biggest acquisition," says Peter Donovan, president of Berkshire. "One of the things that I don't think everybody fully appreciates is that this has been historically a very fragmented industry. We have had a lot of very small companies that do anywhere from $100 million to $300 million of origination. That has been the history of mortgage banking. Just in the last couple of years you have seen consolidation to the point where you have seen something like the top 10 or 12 mortgage companies control something like 60% of the industry."

In the DUS circuit, Donovan says it is not so much merger activity that is driving change but recapitalization. Many companies have been run by founding partners who are now looking to get out of the business, or companies are looking for fresh capital. As a result, equity partners are changing at some of the DUS lenders. "I don't envision a lot of DUS lenders getting together," Donovan suggests. "But some DUS lenders are going to be pushed to do something about finding money partners if they choose to grow."

Another factor driving consolidation is the competitiveness of the industry. "There's clearly a movement toward consolidation in this industry," says Arbor's Queen. "I don't know if it is a good thing or bad thing. What it does say to all of us is, there is a potential for our competition to become even more sophisticated because of the financial wherewithal that some of the larger organizations can bring to bear."

Brad Andrus, a senior director at Irvine, Calif.-based Belgravia Capital Corp., says that his company would like to do more loans than it currently does, but the competition is too strong right now. Last year, Belgravia did $40 million in loans to multifamily and, this year, it is targeting to do $100 million.

"We have kicked around either purchasing an existing Fannie Mae DUS operation or gaining the license for ourself," Andrus says. "I have been resistant to it, only because California is so saturated with DUS players. There are 12 active DUS lenders in California, and they are all fighting for the same bit of business. Belgravia needs to explore for a year and see how the DUS situation will settle out before we throw our hat into the ring."

Is consolidation happening in this industry? Absolutely, says Heller's Petrovski, and the reason being is that the industry is on its way back, and values are going to rise and, if they are not in, they want to be in it and, if they are in it big, they want to be in it bigger. In September 1996, Multifamily Capital Markets was purchased by Resource Mortgage Capital Inc., a Glen Allen, Va., publicly traded REIT that originates, services, securitizes and invests in residential mortgage loans and securities. What Resource picked up was a fast-growing company that did $500 million in low-income housing funding and refinancing last year. Resource Mortgage, says Moore, was looking to get into more of the primary lending business, and it wanted to expand in the commercial arena.

The Fannie Mae DUS multifamily lender ARCS Commercial Mortgage Co. L.P., based in Calabasas, Calif., is looking to do $800 million in loans this year. A number of very big financial companies have been looking to buy ARCS because of its expertise in doing Fannie Mae DUS loans, says Hal Rose, executive vice president, but his company isn't interested in being bought out.

"We have no interest in becoming part of another company, because we are widely held. Our investors don't need to take money out of the company," Rose says. "The competition will weed out the weak organizations. It is going to create consolidation. Those that have footholds in key markets will continue to expand and do well. The competition, especially in the Wall Street conduits, has pushed the spreads down to below what anyone would expect."

REITs The rapid and dramatic growth of REITs has had a significant effect on the lending side of the multifamily industry. REITs still use commercial lending, but the larger REITs can utilize a wide assortment of cheaper financing methods.

Traditionally, real estate for private companies was financed with mortgage loans collateralized by individual properties. With the advent of the large REIT there has been a shift to unsecured debt either with a line of credit from a bank or accessing the short- and medium-term note market with unsecured notes (once the REITs receive an investment-grade rating).

When Walden Residential Properties Inc., a Dallas-based multifamily REIT, went public in 1994, it held a $75 million credit line secured by the mortgages on individual properties. Now it boasts a $150 million credit line that is unsecured. Mortgage companies still provide loans to the smaller REITs, but debt cost less when a company is able to do it on an unsecured basis -- and there is more flexibility for the borrower.

Last year, REITs turned 135 different offerings, of which only two with a total value of $138.1 million were initial public offerings. Public REITs raised $7.3 billion in 86 secondary offerings, $2.6 billion in 45 unsecured debt offerings and $195.3 million in just two mortgage-backed offerings. Those numbers were far below 1995 when the market raised a record $7.32 billion in 93 secondary offerings and $3.4 billion in 73 unsecured debt offerings.

To demonstrate the dramatic growth in unsecured debt financings, back in 1991 there were only three offerings with a total value of just $169 million. That same year there were 20 secondary debt offerings with a value of $786.2 million.

"The growth of REITs has really turned the lending side of the industry," says Don Daseke, chairman and CEO of Walden Residential. "Virtually all of the larger REITs have an investment-grade rating so they are able to access the capital markets. And as we get larger, the percentage of properties secured with individual mortgage loans keeps declining. Our objective would be in five to 10 years to have few of our properties secured by individual loans. We have not done a new mortgage loan since we went public."

Some lenders say the growth of REITs hasn't changed their business in any dramatic manner. "REITs will continue to build up their portfolios of multifamily properties and as a result there will be a few in the hands of third party operators. But there is a large amount of multifamily that is not in the hands of REITs, so it is still a wide-open market place," says Thomas Berkenkamp, head of the real estate finance group for Orix USA Corp. in New York.

Taking an opposite view is RD Capital's Bernstein. "REITs make very stiff competition, and they have changed the market in several different ways. For example, securitization markets provide significant capital for 'B', 'B-' and 'C+' apartments, projects on which the life insurance companies would not lend. The REITs also can afford to pay on a per unit basis or on a cap rate basis a very aggressive price for acquisition. For as long as dividends remain low, almost any acquisition is possible by REITs."

Good companies find a way to adapt to a changing marketplace and Fannie Mae has come to terms with REITs, which White says are "pretty good customers of ours." Fannie Mae offers two products to REITs: credit enhancements for bond deals and a method for REITs to get a secured line of credit. "On the other hand," White notes, "many REITs find it beneficial to do unsecured lending, and we as a secured lender are sometimes at a disadvantage with the financial strategies of the larger REITs."

REITs utilize capital in a manner that is different from the conventional finance market. REITs have other avenues of financing, observes Parallel's Schneiderman. "It's possible that the whole nature of the business is undergoing a fundamental change."

Steve Bergsman is a Mesa, Ariz.-based writer who covers real estate issues.

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