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In August of 2017, we predicted that multifamily developments and deliveries were expected to peak in 2017 and in fact they did. As of the writing of this article, we are still deep in the lease up of many of these developments, resulting in concessions and some softness in class “A” urban apartment market locations. Increasing construction costs, the surplus of developments and tight regulations did finally result in a pause of new projects. We now believe that over the next 12 months we will be able to work through this excess inventory as demand continues to remain strong overall.

<p>Originally taken from a panel discussion with Charlie Williams of KeyBank Real Estate Capital and other co-panelists, they discussed the state of the multifamily real estate capital market. Williams led the pack with his call that this slowing down of developments overall is good for the apartment market. “The market needed this breather so that demand can catch back up to supply in the Class A market.”</p>
<p>Despite the boom in development over the past couple of years, the suburban markets are still going strong as their rents in comparison are significantly lower. We see capital flowing into value-add opportunities and older assets, which can be purchased and updated at a lower cost than building new.</p>

Getting “heads in beds” before breaking new ground

As labor and material costs continue to increase, occupying already-existing buildings has become a priority for lenders eager to get their construction dollars off their balance sheet. “Can we get the heads in beds first and then move forward again?” asked Williams at the panel, also hoping for a “little catch-up” before new deliveries.

The clear message to developers: rent the apartments you’ve already built, and then let’s talk.

The holdup may be caused by other factors, specifically Freddie Mac’s underestimation of the length of stabilization periods. Since Freddie Mac loans have to stabilize before they can be securitized, it’s taken longer for the loans to be offered as securities, further delaying new loans. Williams predicts another 10-12 months before the “big bubble of deliveries” completely stabilizes and becomes available for investors to purchase as debt sources.

Government agencies going with borrowers they trust

The panelists explored the strategies of both Fannie Mae and Freddie Mac as well as the Housing and Urban Development (HUD) department as being relatively similar. HUD’s inundation of applications has allowed them to be pickier with the deals they choose, and part of that increased scrutiny focuses on an applicant’s previous experience with HUD.

With Fannie and Freddie, Williams anticipates they’ll be cautious this year on deals in or recently leased up. Along with HUD, they’ll be more likely to lend to firms with whom they’ve worked before. Of course, a new borrower in an ideal market with a strong portfolio has a chance to overcome that loyalty.

Fannie and Freddie will, however, for stabilized assets continue business as usual, according to Williams. The designated cap on loans they can give out was lowered slightly in 2018 from $36.5 billion to $35 billion, but loans given to multifamily projects aimed at underserved markets with affordable pricing or that attain green certification function outside the caps. “We expect in 2018 they’re both going to be well over $60 billion,” in capped and uncapped business, Williams predicted.

Self-Regulation is Key

In a market with tight regulations and significant federal players, perhaps self-regulation is the solution. “A lot of us still have memories of the last downturn and the Great Recession,” Williams noted. “A lot of it is… being very careful on how far out over our skis we get with construction capital and with deals that have risk.” By maintaining self-awareness and keeping their books in check, Williams ensured that the capital will still be available for multifamily assets.

That isn’t to say that lending has completely halted, or will anytime soon. Despite the slowdown in developments, Williams acknowledges the necessity of lending for new and existing projects. “As it has always been: right sponsor, right location, we’ll figure out a way to get it done.”

With the uptick in multifamily developments over the past 18 months, banks and lenders are staying vigilant of their balance sheet with the Great Recession in mind.

Time for a Breather

Overall though, Williams and the other panelists foresee a healthy market ahead. In the meantime, multifamily projects that carry an affordable, seniors or healthcare component will likely be prioritized by government agencies. And for market-rate multifamily developers—an expected and much-needed breather.

To learn more, contact Charlie Williams at charles_h_williams@keybank.com or 720-904-4449.

To view more news and information from Key, visit https://www.key.com/corporate/knowledge-center/commercial-real-estate.jsp