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Government Gives Ailing Apartment Market a Financial Lift

The beleaguered apartment industry got a double dose of encouraging news from the nation’s capital this past week. The Federal Housing Finance Agency, the regulator that oversees Fannie Mae and Freddie Mac, raised this year’s spending goals for the agencies’ affordable housing programs.

Meanwhile, just-proposed legislation is expected to substantially increase FHA financing levels for new high-rise apartment projects.

Under the revised financing targets, Fannie Mae will buy an estimated $6.6 billion in affordable multifamily mortgages in 2009, while Freddie Mac aims to buy $4.6 billion worth of mortgages, according to the National Multi Housing Council (NMHC). The original special affordable housing goals for this year were $5.5 billion for Fannie Mae and $3.9 billion for Freddie Mac.

Both the original and revised figures, however, are significantly lower than the actual financing levels of last year. In 2008, Fannie Mae purchased $13.3 billion in multifamily mortgages and Freddie Mac bought $7.5 billion, for a total of $20.8 billion for the two government-sponsored enterprises (GSEs), which were placed in federal conservatorship in September 2008.

Still, in view of the ailing economy and Fannie and Freddie’s financial problems, NMHC is grateful that the government has revised the agencies’ investment targets.

“It reflects continuing commitment of the federal government to affordable housing,” says NMHC president Doug Bibby. At the same time, the goals take into account the reality of the situation facing the enterprises, Bibby says. “The goals set for them are not onerous.”

The proposed budget levels enable the agencies to meet the demand for multifamily financing at a time when the industry, like other sectors of commercial real estate, has been damaged by the recession and wrenching job losses. The unemployment rate reached 9.5% in June, according to the Labor Department.

The role of the GSEs in providing financing cannot be underestimated. For years, they have essentially propped up the industry’s capital structure. “Right now they’re providing 90% of debt capital for multifamily housing. I don’t know how much more they can do,” says Bibby.

Although demographic trends are expected to bolster the multifamily sector over the long run, in the short term the industry has been hurt by weakening real estate fundamentals amid a deteriorating job market.

According to New York-based research firm Reis, apartment properties registered the weakest second-quarter performance in a decade. The national vacancy rate rose to 7.6%, up 30 basis points from the first quarter, and up 150 basis points from the second quarter of 2008.

Real Capital Analytics (RCA), a research firm also based in New York, reports that apartment transactions plunged 81% year over year in the first five months of 2009.

In addition, the $2 billion in apartment sales reported in the first quarter of 2009 was far lower than the $7 billion in sales recorded in the first quarter of 2008, according to RCA, and it was the lowest dollar volume in sales since RCA began tracking the data in 2001. In the peak year for sales, 2007, $19 billion in transactions were reported in the first quarter.

FHA financing could increase

Meanwhile, legislation just introduced in Congress would increase FHA loan limits for high-rise apartment developments. The FHA Multifamily Loan Limit Adjustment Act of 2009 would raise loan limits for the high-rise projects to 50% higher than financing for non-elevator properties.

That means FHA would raise the financing limits from $68,070 per two-bedroom unit for an elevator property to $93,029.

House Financial Services Committee Chairman Barney Frank (D-Mass.) has indicated that he supports the bill, according to NMHC. Congress is expected to act on the legislation after it returns from this month’s recess.

“That’s a very positive thing for the industry,” says Bibby. It would not only help with the development of high-rise structures, but it would also give builders more flexibility to produce the kind of housing consumers want. “What we need right now is a wide range of housing choices for consumers. We had several years of underdevelopment of multifamily housing.”

Like developers at the lower end of the market, who have been strapped by stress in the low-income housing tax credit program and a lack of investors, companies that build high-rise rental units at the upper end of the market have also been hurt by the lack of available financing.

Although it’s too soon to tell what the fate of the legislation will be, the apartment industry is encouraged, Bibby says. “We’re hopeful.”

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