Untold story: Capital sources shift

Much has been written about why the multifamily sector is better positioned to ride out the current down cycle. A factor that has not received as much attention, however, is the shift in capital sources in the last decade.

In the past, banks and thrifts dominated the market for multifamily mortgage debt. In fact, as of 1990, they collectively held 45% of the outstanding apartment mortgage debt. In the intervening 10 years, however, their share of the market dropped while the government-sponsored entities (GSEs) — Fannie Mae and Freddie Mac — and Wall Street, through commercial mortgage backed securities (CMBS), grew in market share. By the end of this year, the GSEs will have almost doubled their share of the outstanding market debt, from 10% in 1990 to 18%.

The impact of the GSEs' influence in apartment financing is significant. Observers agree that apartments can weather down cycles better than other sectors of the real estate industry because people always need a place to live, and in a down market many will put off buying a home and remain in their apartments. But this is only part of the story.

Another reason apartments have risen to their current most-favored status among investors is that they have better access to long-term, low-cost capital than other real estate sectors thanks to the involvement of the GSEs in multifamily financing. The combination of Fannie Mae's development of a risk-sharing lending program, through its Delegated Underwriting and Servicing lenders, and Freddie Mac's re-entry into the multifamily market in 1994 have created a variety of low-cost financing tools for apartment owners that simply are not available to other real estate sectors.

GSEs show strength and flexibility

Undeterred by the current shifts in the economy, the multifamily lending units of Fannie Mae and Freddie Mac are more active than ever. Freddie Mac says that as of the end of May, it has funded $3.6 billion in multifamily mortgages and construction loans in 2001, and Fannie Mae estimates $7.75 billion for the same period. The two GSEs currently account for almost $75 billion of the $411 billion of outstanding multifamily mortgage debt, and both expect to equal or better their 2000 performance.

Apartment owners have greatly benefited from Fannie and Freddie's expansion given their reliability, the ever growing variety of products they offer, and their uniform loan documents and common credit standards. Both offer capital for conventional properties, properties with units set aside for low- and moderate-income families, seniors housing, and tax-exempt, private activity bonds. The firms furnish portfolio lenders with access to credit for the acquisition of properties through credit accounts and provide other multifamily mortgage holders with the ability to trade their mortgages for guaranteed, multifamily mortgage-backed securities. In sum, the GSEs have increased liquidity to the market and, thus, have created more efficient terms.

Wall Street

Wall Street is also an important new partner. While the growth in the CMBS market has increased competition and introduced standardization to the entire commercial real estate industry, the apartment sector has benefited more than others. Multifamily mortgages attract a premium in the CMBS market because of their stability, uniform income streams and relative resistance to economic changes. These premiums have effectively mandated apartments as a required asset class and ensured that multifamily mortgages receive the lowest mortgage rates and preferred terms. It is estimated that more than $50 billion of CMBS issuances since 1993 are for multifamily mortgage debt.

The CMBS isn't the only public capital source. After a couple of down years, REITs are getting creative in their efforts to improve returns. Through mergers and acquisitions, aligning with investment partners at the deal level and expansion options combining acquisition and development, apartment REITs expect continued strong performance in 2001.

Regardless of what lies ahead, it appears that the capital markets will avoid the write-offs and workouts common in past down cycles. The shift from the thrifts and banks to the GSEs and Wall Street should prove to be a better foundation for tough economic times. All in all, multifamily should fare well, and capital should remain available for sound apartment deals.

David Cardwell is vice president of finance and technology for the National Multi Housing Council (NMHC), Washington, D.C. NMHC represents the nation's leading firms participating in the apartment industry.

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