Lenders Rush to Make Loans on Apartment Properties

Lenders Rush to Make Loans on Apartment Properties

Lenders of all types keep making loans on apartments properties—often beating the records set last year.

“So far, it’s been a very robust year—another kind of record half for us,” says David Brickman, executive vice president and head of the multifamily business for Freddie Mac.

Permanent loans are still readily available, even compared to a very busy 2015. Low interest rates are luring borrowers and lenders continue to offer relatively generous terms for permanent loans.

“Both life company and Fannie Mae and Freddie Mac financing is readily available,” says Richard B. Swartz, executive managing director for real estate services firm Cushman & Wakefield.

Construction financing to build new apartment projects may be more difficult to come by, however, as some lenders worry about overbuilding.

Originations increase

Lenders made slightly more multifamily loans in the first quarter of 2016 than during the same period in 2015, according to the originations index kept by the Mortgage Bankers Association (MBA). The MBA index for multifamily rose 2.0 percent in the first quarter compared to the year before. Many bank lenders have become more competitive in their offers of permanent financing at the same time as they are more conservative for construction financing.

Lenders are likely to make $282 billion in loans to multifamily properties in 2016, according to Freddie Mac’s Mid-Year Multifamily Outlook. That’s up significantly from $262 billion in 2015.

“The outlook for multifamily this year and going forward is strong, largely driven by the strong demand, the demographics, shifting preferences,” says Brickman. “Although we do see it growing slower than it has before.”

Lenders who offer Fannie Mae and Freddie Mac loans are leading the way. Last year the federal regulators who oversee Fannie Mae and Freddie Mac loosened the restriction on how much they could lend so that affordable housing no longer counts toward the $30 billion cap on each agency. Low yields on 10-year Treasury bonds have also helped keep interest rates very low for permanent financing.

This year, Freddie Mac lenders are expected to originate $53 billion in loans, up from $47 billion in 2015. Freddie Mac has already purchased $27 billion permanent loans on apartment properties in the first half of 2016. “That puts us pretty much on pace to where we expect to end the full year,” says Brickman.

Balance sheet lenders are also eager to make permanent loans to fully-occupied apartment properties with proven income from rents—especially compared to loans to build new apartment properties. “We have seen our competition become more aggressive on cash-flowing loans and more conservative on construction,” says Erin Peart, senior vice president for Wells Fargo in Washington, D.C.

Lenders are also tightening their standards for apartment loans, especially for construction financing. The percentage of loan officers who say loans are harder to get has risen steadily in 2016, according to the July 2016 Senior Loan Officer Opinion Survey on Bank Lending Practices from the Federal Reserve. Net 44.3 percent of survey respondents reported “tightening standards” for multifamily loans.

Just to compare, in 2014 and 2015, loans officers were more likely to be evenly split between those reporting tightening standards and those loosening their standards. The “net percentage” of officers reporting tightening standards hovered near zero.

Demand for multifamily loans is also still rising from borrowers — though not as quickly. A net percentage of 8.6 percent of loans officers said that demand was up, compared to 17.1 percent the year before.

“We’re going strong,” says Freddie Mac’s Brickman. “I believe there is some heightened demand for mortgages with some other participants potentially going back a little bit.”

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