March 16, 2021

Capital Corner: Equity appeal deepens across multifamily, industrial property types

GSE lending fueled by vaccine rollout, changes in Treasury

Equity providers remain intrigued by the thesis of multifamily, delving into new ways to invest in the property type by targeting value-add, core-plus, built-to-rent, and opportunity zone niches in all Sunbelt MSAs. Just as our economic commentary noted last week, the job growth centers in the Sunbelt are attracting all capital sources as a new group of employees follow jobs. With the continued debt stability from the agencies, the equity providers are bringing investors new ways to leverage capital to expand and improve their portfolios.

The geographic shift into the Sunbelt’s high-growth, low-barrier markets has encouraged equity sources to bring creativity and flexibility to attract the best transactions. NorthMarq’s experts collaborate to simplify the three transactions – equity, debt, and investment sales – making transactions faster and easier for the borrower. The four categories in most demand from equity sources (and life company debt providers) include:

The Built-to-Rent category, once solely an option in the Phoenix MSA, has now expanded into most Sunbelt states, driven by tenant demand for the single-family living experience without the single-family hassles or financial commitment. Post-pandemic, we expect this property type to flourish in more markets, with the product becoming more professional, planned, and popular than the initial burst of single-family rentals common after the 2008 recession. NorthMarq has completed more than 10 sales of BTR properties, and is ready to list two more. In each case, equity providers are interested in structuring packages for these in-demand properties.
Value-add properties offer the equity source the opportunity to define their contribution and length of commitment, given that the original investor can recapitalize to change investors as the project’s improvements are implemented. With the pandemic slowing down improvements on occupied units, some equity sources can elect to move out of the asset with recapitalization before the renovations are complete.
Core-plus has expanded to include suburban new development, which is anticipated to increase in 2021. Equity investors express openness to consider most new development, but especially in the solid first-tier markets across the country. While some pandemic-related vacancy remains in the CBD’s, that is expected to strengthen as the country returns to more normalcy with increased vaccination rates.
Opportunity Zones remain active across the country, with multifamily properties being the most active product type to take advantage of the tax incentives. NorthMarq’s Seattle office recently completed equity placement with two different properties.

Outside of investment-darling multifamily, industrial remains a strong candidate for equity attention, although many transactions are built and sold before equity providers can throw their hat into the ring. Across many Midwest and West markets, distribution centers for logistics and fulfillment remain the strongest tenants for mostly speculative properties. When those developers need additional funds, it is generally to start the next project before the existing one has been sold. NorthMarq’s Salt Lake City office c ompleted an equity arrangement in late 2020

Changes in Treasury yields slow some GSE lending; vaccine rollout to encourage student and senior housing transactions

Freddie Mac
With the continued rise in Treasuries and increased competition from Debt Funds, Freddie has seen a slowdown in business. They are also attributing the slow down to a lack of acquisitions in most markets. Freddie anticipates a revival of for-sale properties some time during the second quarter. We are hopeful to see a decrease in spreads to help offset a portion of the increase in Treasuries. Freddie is also discussing lowering their thresholds for the debt service reserve, with an announcement expected soon. With the passing of the American Rescue Plan and increased vaccinations, the economy’s rebound should help hail the return of many programs that have been sidelined, such as student housing and value add.

Fannie Mae
Over the last few weeks, volatility in the bond and equities markets has held the economic spotlight. With Treasury Bonds selling off through the month, 10 year Treasury yields reached as high as 1.64% before settling into the 1.50% - 1.60% range these last few days.

However, demand for DUS paper has remained strong, which has kept spreads down and Note Rates generally below 4%. With the continued rise in interest rates, Fannie Mae has seen an increase in ARM inquiries as investors seek more attractive Note Rates. Fortunately, Fannie Mae has made some changes to their ARM platforms in 2021, making us more competitive in this space than we have been in previous years.

As noted previously, affordability will be the name of the game in 2021. In that vein, Fannie Mae will be unveiling a new loan product in the coming weeks – Sponsor-Initiated Affordability. This will be a conventional loan product aimed at created or preserving existing “Mission” units. Under this program, borrowers may voluntarily enter into a regulatory agreement that will restrict at least 20% of units at or below 80% AMI rents. This regulatory agreement would exist for the term of the Fannie Mae loan, and provide significant rate benefits to the sponsor. More restrictive regulatory agreements may carry additional pricing benefits.

FHA/HUD
In early March, the Senate officially confirmed the appointment of Marcia Fudge as the new Secretary of Housing and Urban Development. Ms. Fudge enjoyed bipartisan support, and she is expected to continue her strong advocacy for affordable housing that she demonstrated during her time in the House of Representatives. The 2020 HUD MAP Guide will be fully implemented on March 18, and HUD expects a surge of loan applications to be submitted in the days leading up to March 18.

It is expected that this anticipated increase in new transactions will require HUD to continue utilizing a queue system in most of the production offices. To counteract the queue at HUD, NorthMarq is focused on efficiently reducing the time it takes to submit an application in order to expedite the overall timeline. NorthMarq’s pipeline with FHA transactions remains at record levels, and we expect the trend to continue through the remainder of 2021.