June 15, 2020

Capital Corner: Freddie Mac unveils updates that show “Game On” for multifamily lending

In this edition of our Capital Corner, we are focusing on updates from Freddie Mac, which were issued last week. That update offered concrete examples of what many of us are feeling – that we’re coming out of the doldrums and into a more normal business environment.

Some key points from Freddie Mac’s NorthMarq team:

Inflows are near pre-COVID levels, with acquisition financing coming back to around 25% of their business.
$8 billion of loan requests were submitted in the first two weeks of June, which is nearly on par for pre-pandemic levels.
Debt service reserve requirements have been reduced, requiring less upfront equity for many acquisitions.
Specialty products, including lease-up and student housing, are back on Freddie’s radar and have selectively been pursued.

We see this update from Freddie to be indicative of the activity level and interest from lenders across the board. These positive trends mean the multifamily market is in “Game On” territory and not a moment too soon. While the picture is mostly rosy, one consideration has the potential to slow our industry from being completely back to normal.

The pandemic slowdown resulted in a huge loss of revenue for most municipalities. The result is that in many markets, some tax assessments are coming in at double the current value to bring revenue into the taxing entities. Since most refinance requests will have to finalize property taxes before closing, this additional burden has the potential to slow down the refinance process until resolved. We encourage you to reach out to our offices when encountering this situation, as we can help validate value and reset the assessed value.

But on the flip side, we’re pleased that the debt service reserve levels have been reduced, since that requirement was impacting the bid-ask gap in pricing and dampening the velocity for investment sales. With more balance in the equation, the underlying agency financing will be more accretive to a buyer’s return thresholds. Our investment sales team almost immediately saw new “green shoots” of activity and interest with that change to the requirement.

Finally, while new acquisitions were down in the last three months, Freddie Mac announced additional financing structures that offer more efficiency for borrowers. From a longer-term option at 15-year mortgage to shorter-term and floating rate structures, borrowers have new options to consider based upon the short-term and long-term business goals.

The fundamentals of multifamily have retained the strength that many of us knew was there. Rent collections are holding steady near 90%, and the May jobs report came in better than expected. Both metrics help provide more confidence in the future of the sector.

In two weeks, we’ll provide an overview of the lending environment within Fannie Mae’s DUS platform. In the meantime, we continue to take the pulse of hundreds of hundred life company, bridge and CMBS lenders. As cities and states open to more normalcy in operations, we expect to continue to see positive momentum bringing our industry into a very busy fall.