Western Real Estate Business

JUN 2018

Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.

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32 • June 2018 • Western Real Estate Business www.REBusinessOnline.com CAN AGENCY LENDERS KEEP UP THE PACE? Multifamily loan production for Fannie and Freddie reached record highs in 2017, but rising interest rates threaten to curb activity this year. By John Nelson F annie Mae and Freddie Mac are coming off a banner year that saw both agencies break their previously held records for annual multifamily loan production. Fannie Mae produced $67.1 billion in financ- ing, while Freddie Mac's 2017 volume was $73.2 billion. For the third year in a row, Freddie Mac was the nation's top multifamily financier. "Last year saw somewhat unex- pected growth, and it was very broad- based," says David Brickman, executive vice president and head of Freddie Mac Multifamily. The agency's pro- duction last year far surpassed Brick- man's estimate of $60 billion that he made a year ago, thanks largely to the gains in Freddie Mac's targeted af- fordable and small balance business lines. The largest leap, though, was in its Green Advantage program. "There was very little green busi- ness in 2016, $3.3 billion, and then a significant jump in 2017 — $18.7 bil- lion," says Brickman. (See "Agencies Pump Up Green Business" on page 33.) Through the first quarter of 2018, the agencies are do- ing less business in conventional loans than in previous years. Phyllis Klein, vice president for multifamily custom- er engagement and marketing at Fannie Mae, says that the agencies are closing fewer acquisition loans than last year, stemming from rising interest rates. "It's been a tougher year with the rise in interest rates and the slow- down in some acquisition activity," says Klein. "It's been tougher for most of our top borrowers to acquire prop- erties." In the first quarter of 2018, Fannie Mae closed about $11.3 billion in new multifamily business, a significant step down from its $17.4 billion pro- duction in first-quarter 2017 and blis- tering $20.3 billion in fourth-quarter 2017. Freddie Mac closed about $13 bil- lion in new multifamily business in the first quarter, up slightly from first- quarter 2017 and down about 53 per- cent compared to its record-setting fourth-quarter 2017. Tipping the Cap In addition to record highs for mul- tifamily financing, Freddie Mac and Fannie Mae turned another corner in 2017 as more than half of their busi- ness was excluded from the $36.5 bil- lion lending cap set forth by the Fed- eral Housing Finance Agency (FHFA). As part of the terms while under conservatorship, the FHFA established the cap as a means for directing Fannie Mae and Freddie Mac to serve as back- stops for the multifamily finance mar- ket while not edging out private capi- tal. The FHFA incentivizes the agencies to provide liquidity in affordable and underserved market segments of the multifamily continuum by exempting those loans from the cap. In years past, the multifamily pro- duction for the two government-spon- sored enterprises (GSEs) has gener- ally followed the pattern of one-third excluded from the cap to two-thirds capped, or a 33 percent exclusion rate. For the first time since the cap ex- clusions were introduced, Fannie Mae and Freddie Mac both closed a major- ity of their business outside the lend- ing cap. Both GSEs settled around 54 percent in uncapped business for 2017. So far in 2018, the two agencies are doubling down in that space. For Fannie Mae's first-quarter 2018 business, 62 percent was excluded from the cap. "The exclusion rate of 62 percent is above where we were all of last year," says Fannie Mae's Klein. "It's giving us quite a bit of uncapped run rate through the end of the year, which makes it easier for us to stay competi- tive." Freddie Mac is trending about the same as last year, with an approxi- mately 54 percent exclusion rate in the first quarter of 2018. "In the first quarter we are seeing a flattening of our conventional busi- ness, and in aggregate we are dead on to last year's trajectory," says Brick- man. Included in FHFA's cap exclu- sions are targeted affordable housing whereby rents for more than half of a property's unit count are restricted and/or receive government subsidies. Also excluded from the cap are small multifamily properties that include five to 50 units, manufactured hous- ing and affordable properties in high- cost markets and rural areas. Seniors housing for residents earn- ing 80 percent or less of the area medi- an income (AMI) is also exempt from the cap, as well as properties in the GSEs' green programs that can project energy or water savings exceeding 25 percent. Both Fannie Mae and Freddie Mac set new annual records for new seniors housing business, producing $5.5 billion and $3.6 billion in 2017, respectively. Don King, execu- tive vice president of multifamily finance at Walker & Dunlop, says that Fannie Mae and Freddie Mac's strong presence in FHFA's uncapped categories fulfills a very important role. "With respect to multifamily, Fannie Mae and Freddie Mac are doing ex- actly what they were designed to do: providing liquidity in all markets all of the time," says King. Shifts in Underwriting In late April, the 10-year Treasury yield eclipsed 3 percent for the first time in four years and ultimately reached a seven-year high in mid-May at 3.126 percent. Multifamily lenders have been tracking the benchmark rate with a wary eye, unsure of how the movement will affect borrowers' decisions. "As lenders we were all worried and that borrowers would emotionally react," says Peter Donovan, executive managing direc- tor of CBRE Capi- tal Markets. "What we've seen is that spreads have come in, so the net effect for borrowers is 20 to 25 basis points, which generally they can live with." Although spreads coming in miti- gates some of the volatility of interest Fannie Mae provided more than $67 billion in financing and supported over 750,000 units of multifamily housing in 2017 — the highest volume in the history of its Delegated Underwriting and Servicing (DUS) program. Source: Fannie Mae Multifamily 2017 VOLUME $9.1 billion $8.0 billion $5.2 billion $5.1 billion $4.6 billion $4.2 billion $3.4 billion $3.2 billion $3.2 billion $2.9 billion LENDER 1.) Walker & Dunlop 2.) Berkadia 3.) Wells Fargo 4.) CBRE 5.) Berkeley Point Capital 6.) KeyBank 7.) PNC Real Estate 8.) Arbor Commercial 9.) Greystone 10.) Capital One TOP 10 FANNIE MAE DUS LENDERS IN 2017 TOP 10 FREDDIE MAC MULTIFAMILY LENDERS IN 2017 LENDER 1.) CBRE 2.) Berkadia 3.) Walker & Dunlop 4.) HFF 5.) Berkeley Point Capital 6.) Wells Fargo 7.) Capital One 8.) KeyBank 9.) Greystone 10.) JLL 2017 VOLUME $12.7 billion $8.1 billion $7.7 billion $6.7 billion $4.7 billion $4.6 billion $3.7 billion $3.5 billion $3.3 billion $2.3 billion Freddie Mac Multifamily financed an industry-leading $73.2 billion in loans in 2017, financing approximately 820,000 rental units. For the third consecutive year, Freddie Mac led the nation as the top multifamily financier. Source: Freddie Mac Multifamily Brickman King Klein Donovan

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