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Are Multifamily Markets Taking a Breather?

by KeyBank Real Estate Capital 08.04.2017

With multifamily developments expected to peak in 2017, the market may seem as if it’s in tip-top shape. But increasing construction costs, a surplus of developments and tight regulations have some multifamily lenders calling for a pause in new projects.

At a recent Bisnow panel on multifamily lending in Dallas, Charlie Williams of KeyBank Real Estate Capital and co-panelists discussed the state of the multifamily real estate capital market. Williams led the pack with his call for a slowing down of developments requiring construction loans.

Despite the boom in development, a high volume of construction loans and increasing vacancy rates are preventing lenders from opening up their balance sheets. And when banks can’t take on more assets, developers will find it harder to obtain loans.

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. 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, continue business as usual, according to Williams. The designated cap on loans they can give out remained the same as 2016 at $36.5 billion, but loans given to multifamily projects aimed at underserved markets with affordable pricing or that attain green certification function outside the caps. “This year 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 division earned more assets to maintain a balance.

That isn’t to say that lending has completely halted, or will anytime soon. Despite Williams’ request for a slowdown in developments, he acknowledges the necessity of lending for new projects. “We’re not pulling back, and like I always say: right sponsor, right location, we’ll figure out a way to get it done.”

With the uptick in multifamily developments, banks and lenders are staying vigilant of their balance sheet with the Great Recession in mind. An excess of construction loans has caused lenders to crave a partial pause in developments for Freddie Mac to catch up.

Time for a Breather

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 or 720-904-4449.

To view more news and information from Key, visit

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