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What to Expect for Multi-Housing Property Debt in 2015

Tuesday, January 27, 2015

It is starting to sound obnoxious to continue to state this year over year, but 2014 was another banner year for multi-housing finance. The headlines from the start of 2014 continued to revolve around the Fed’s anticipated curtailing of quantitative easing and the subsequent removal of downward pressure on interest rates. As a result, many market participants projected the 10-year Treasury to end the year at 3.3 percent or higher. The opposite occurred with the ten-year ending the year at 2.17 percent, an 83 basis point drop from where it started the year at 3 percent.

This fueled a variety of acquisition and refinance activity throughout 2014. Using HFF’s volume as an example, multi-housing debt in 2014 increased by 33 percent year over year from 2013, closing over $10.7 billion in 2014. On top of all of this positivity, the fixed income market continued to add market participants creating more liquidity throughout the capital stack.

GSE’s are still the dominant force

Capital consumers were dubious of the production capabilities of both Freddie Mac and Fannie Mae due to the FHFA’s “dialing back” their respective production goals by 10 percent from the year prior. Even with the lowered volume metrics, and year-end metrics to be confirmed, the agencies continued to dominate the space with both Freddie Mac and Fannie Mae closing close to $30 billion each. Freddie Mac specifically came out with new rate lock and loan programs that gave consumers additional options when faced with new financing opportunities. In addition, the agencies remain the only real source in the market that doesn’t impose floor rates.

2015 is shaping up to be more of the same, with production goals set around $30 billion for each group. We believe that both will continue to dominate the long term fixed rate financing multi-housing finance space in 2015.

CMBS: Maturities and Players

On any particular day, you will find around 43 different CMBS groups actively originating CMBS loans for securitization. This is up significantly year-over-year and has resulted in hyper competition for CMBS loans. Total 2014 U.S. CMBS volume was $94.1 billion over all product types, marking a 9 percent increase over the prior year. Originators continue to find a great niche in the multi-housing space where other lenders are less aggressive. CMBS lenders are not hesitant to provide financing for student housing, properties in tertiary markets and military housing. In terms of structure CMBS is often more generous with interest-only portions. Multi-housing continues to make up approximately 15-20 percent of securitization pools.

The 10-year swap rate is currently hovering around 2.1 percent, which puts all-in rates at sub 4 percent for 10-year fixed-rate loans today. We anticipate similar volume or more as rollovers of existing CMBS loans will continue to increase over the next two years. As CMBS 2.0 continues to mature, we anticipate there being a continued push/pull with originators and the rating agencies/B-piece buyers, specifically over product enhancements like interest only and other structuring requirements. Overall, continued demand for quality underwritten CMBS product is anticipated which will benefit borrowers and spreads well into 2015.

Insurance Companies: Searching For Yield and Multi-housing

Insurance companies finished 2014 with another banner year of multi-housing lending. For some insurance companies, multi-housing consists of up to 50 percent of their total portfolio. However, there is continued appetite for the product type across the sector. As is typical in any calendar year, we expect insurance companies to be very aggressive in 2015 placing the majority of their commitments in the first six months. Increased production volumes for larger insurance companies have allowed them to remain active throughout the year.

CIO’s of these institutions continue to see a very attractive yield for commercial mortgage investments when comparing to other investment opportunities such as corporate bonds. Yields are in high demand, which has allowed some insurance companies to search for alternative real estate investments such as joint venture equity and higher leverage bridge loans. Ten-year fixed rate borrowing rates today are 3.50 to 4 percent for 65-percent loan-to-value leverage. The one item of caution is dependent highly on where the ten-year Treasury remains, as the majority of insurance companies will implement floor rates in a low Treasury environment to maintain required yields. Look for this trend to continue with a ten-year Treasury sub-2 percent.

Banks: Basel III Ramifications

January 2015 marks the start of what we have all heard a significant amount of chatter about for the past two years, Basel III. Over the course of 2014, we gradually saw the major lending institutions begin to adapt to these new reserve requirements, some sooner than others. The biggest impact that this will have is on construction and unfunded commitments like revolvers. In some cases this can require banks to hold three times more in reserves than previously for these “riskier” loans. Discussions with larger market participants suggest a potential increase in pricing of 25-50 bps off last year’s baseline credit spreads.

Larger banks with over $700 billion in assets are initially impacted the most. Small banks will not have the same reserve requirements. There will also be pressure on longer (five-plus years) term loans as they are more expensive for the banks to reserve against. All of this aside, banks have continued to compete for quality multi-housing real estate and just as important quality borrowers throughout 2014.

With 30-day LIBOR at .16 percent, this continues to allow for extremely low pay rates for borrowers (sub 2.5 percent) which has been attractive on heavy value-add or repositioned deals. We anticipate this continuing to be an attractive financing vehicle for multi-housing real estate throughout 2015 allowing consumer’s ultimate flexibility and renovation options on their value add product. Banks continue to be the largest holder and provider of commercial real estate debt holding over $1.53 trillion in volume and we anticipate this to be more so into 2015.

More of the same in 2015 for Multi-Housing Real Estate

With continued international duress, the 10-year Treasury has plummeted well below any forecast from 2014. According to Trepp, over $350 billion of commercial real estate debt is coming due in 2015, making the refinance market very active in 2015. Credit spreads have been somewhat volatile in the first part of 2015 however; we anticipate this to level off with solid competition, continued improving fundamentals throughout the country, strong appetites for multi-housing real estate, and the traditional competition that breeds at the January MBA, NMHC and CREF-C conferences. With refinance volumes high and the 10-year at an extremely low level, borrowers are prudent to address maturities early in 2015.

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