New Year, New Outlook for Southeast Capital Markets

Trevor Ritter, VP, KeyBank Real Estate Capital , January 2018

We’re greeting 2018 with good vibes about the capital markets, paired with widespread acknowledgment that we’re long in this real estate cycle. I joined a panel of my colleagues in banking, commercial mortgage brokerage, and agency lending at the Interface Southeast conference recently. We discussed the availability and cost of capital for investment and development transactions – and whether the restraint on construction financing will ease.

The overall sentiment is positive. Although select primary and coastal markets are overbuilt, communities in the Southeast still have room for supply, particularly in workforce housing and affordable housing. The trend of people moving from the coasts to markets like the Southeast – seeking lower rents and improved quality of life – is expected to continue. On the construction side, there’s measured optimism as debt leverages creep up, while on the acquisitions side, many players are clamoring for good deals. Banks, federal agencies, and alternative sources of capital are all expected to be active in the coming year.

Change in HVCRE Rules May Bring Loans Back to Banks

New legislative changes may ease some of the constraints on banks that contributed to the pullback in lending. In November 2017, the U.S. House of Representatives passed the H.R. 2148, the Clarifying Commercial Real Estate Loans Act. The bipartisan legislation clarifies and amends parts of the Federal Deposit Insurance Act to clarify capital requirements for loans classified as high-volatility commercial real estate (HVCRE), including which types of loans should and should not be classified as HVCRE loans.

The bill permits the appraised value of real property to count toward a 15 percent equity threshold in order to be exempted from HVCRE designation. Additionally, the legislation provides an off-ramp from HVCRE designation when a loan matures and qualifies for underwriting standards for permanent financing. The clearer and less restrictive regulations may serve as a catalyst for bank lending in 2018.

Continued Competition in Acquisitions Market

On the acquisitions side in 2017, investors were actively seeking deals, and 2018 is expected to be more of the same. At KeyBank Real Estate Capital in the Southeast market, we sized deals for local and regional clients that faced increased competition from foreign capital and West or East Coast investors who don’t know the market as well.

Our clients’ experiences spoke to a larger, national trend of an influx of outside buyers coming to secondary and even tertiary markets chasing yield. To win deals, local buyers need to be well in tune with the broker community and be ready to move quickly on the financial front with equity raised and money down. KeyBank has stepped up to close multiple deals on the balance sheet to help clients close quickly and give a certainty of execution in order to help them win new acquisitions.

The value-add space, in particular, has seen this trend of a greater number of outside capital sources coming into the market. Factors such as high valuations and weakening rents in the Class A and AA category have contributed to this shift towards value-add investment strategies.

Federal Agencies’ Importance Will Continue

The U.S. Department of Housing and Urban Development (HUD) has played an active role in the multifamily resurgence over the past several years. The Freddie Mac Small Balance Loan Program, which provides loans on multifamily properties with five units or more ranging from $1 to $5 million, has been particularly important for borrowers who may have struggled to find financing for these smaller sized loans.

The rehabilitation programs at Freddie Mac and Fannie Mae have been a boon in the value-add space. And the streamlining of processes at HUD has helped make the application and approval process more efficient, particularly when borrowers work with designated underwriting and servicing lenders that can help them navigate it.

For 2018, The Federal Housing Finance Agency (FHFA) announced that the 2018 multifamily lending caps for Fannie Mae and Freddie Mac will be $35 billion for each agency, down from $36.5 billion in 2017 based on projections of the overall size of the 2018 multifamily originations market. This means the 2018 originations market is expected to be slightly smaller, but relatively stable.

Looking Ahead in 2018

The fundamentals are in place for another strong year in multifamily financing in the Southeast market, barring an unexpected significant geopolitical event or large increase in interest rates. For those on the acquisitions side, it’s important to work with a lender who can evaluate the market trends and how outside capital is affecting them. On the development side, it’s crucial to understand how changes in the regulatory environment and federal programs will impact the availability of capital. At KeyBank, our experts can connect borrowers with financing solutions available through CMBS, Freddie Mac, Fannie Mae and FHA/HUD and Life Placement.

To discuss these insights or for more information, contact Southeast Region Vice President Trevor Ritter at or 770-510-2105.

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