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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www.REBusinessOnline.com Western Real Estate Business • June 2018 • 33 rates, lenders have noted that borrow- ing activity is shifting more toward fixed interest rates and longer terms as borrowers look to hedge against potential interest rate risk. "Investors are taking the opportu- nity now to lock in more 12- to 20-year, fixed-rate options," says John Randall, senior vice presi- dent and deputy national production manager of Grand- bridge Real Estate Capital. "We previously had 50 to 75 percent of our borrowers preferring floating- rate debt," adds Mitch Sinberg, se- nior managing di- rector of Berkadia's South Florida office. "Now, about 75 per- cent of our investors are choosing a fixed interest rate because they don't want to take interest rate risk as much as they were willing to take previously." Rising interest rates are also spur- ring borrowers to refinance their ex- isting loans, sometimes even ahead of maturity. "The 10-year Treasury yield passing 3 percent has encouraged many bor- rowers of properties with maturing loans later this year and early next year to refinance early," says Fannie Mae's Klein. Charles Foschini, senior managing di- rector of Berkadia's South Florida office, says that borrowers looking to sell their assets are increas- ingly opting to refi- nance instead. "Sellers who don't hit their value target and aren't under pressure to sell will generally refinance and hold," says Foschini. "Those on the fence about refinancing for whatever reason may see this as the last time to catch the valley of the market before interest rates regress to- ward the historical mean." What the Future Holds In late 2017, the FHFA decided to revise the lending cap for 2018 down to $35 billion. The agencies, which together with the Mortgage Bankers Association (MBA) and FHFA meet quarterly to review and assess the size of the multifamily originations market, are interpreting FHFA's de- cision to mean that there will likely be a step back in overall originations volume. "The FHFA bases the lending cap on projections of the overall size of the originations market, and they do ex- pect it to be slightly smaller than the market in 2017," says Fannie Mae's Klein. Despite the scaled-back cap, Brick- man projects that Freddie Mac's an- nual loan production this year will be on par with 2017. "We are expecting to be flat or a little bit up from last year. We don't see the revised cap making a signifi- cant difference," says Brickman. "Last year we didn't use all the $36.5 billion of the cap. It was the first time since the cap was introduced that we didn't use it all. We actually used less than $35 billion, so it was under this year's cap." If the first quarter is any indication, refinancing will outpace acquisition financing in 2018, largely due to the rising interest rate environment. "Last year 56 percent of our GSE business was acquisitions, and in the first quarter of 2018 it's at 42 percent," says Walker & Dunlop's King. "It's too soon to tell if that's a trend. If rates stay somewhere close to where they are now, I expect business will con- tinue to move forward." CBRE's Donovan says that despite rising interest rates, many investors have capital that they're looking to al- locate for multifamily acquisitions. "Everyone has more money than they did last year," says Donovan. "We've had 50 clients tell us in private meetings that they had at least $1 bil- lion to invest in multifamily in 2018." Counter-Cyclical Debt Fannie Mae and Freddie Mac are both tasked with providing liquidity in underserved markets and in the af- fordable housing sector, which is in dire need of new housing supply. The agencies are using every tool at their disposal to help preserve and develop new product. "We're going to be looking to ag- gressively pursue opportunities and support efforts to finance new con- struction," says Fannie Mae's Klein. "We're really looking forward to mak- ing sound investments to increase the affordable housing supply, especially in underserved markets. About 43 percent of the nation's low-income households pay more than half of their income for rent. We've got to help increase the supply of affordable rental housing." The fate of the agencies has been a widely discussed topic since go- ing into FHFA conservatorship in 2008. Mel Watt, current director of the FHFA, will end his five-year term next year. Lenders are unsure what the future holds as that could prove an opportune time to make widespread changes in the structure of the GSEs and their multifamily business prac- tices. "We're faced with the issue of agency reform still hanging over our heads, and it's hard to predict what impact this could have because in many ways we seem no closer to a solution," says Frank Lutz, execu- tive vice president and chief production officer at Arbor Commercial Funding. Lutz is quick to point out that until that day comes, the GSEs will still be Borrowers interested in taking advantage of Fannie Mae and Freddie Mac's green lending programs are working a little harder to qualify this year. Following a decision made in late 2017 by the Federal Housing Fi- nance Agency (FHFA), multifamily borrowers that fi- nance their properties through Fannie Mae's Green Re- wards or Freddie Mac's Green Advantage programs now have to plan improvements for at least 25 percent savings in energy or water usage to qualify. In previous years, Fannie Mae loans that financed green improvements had to account for 20 percent for en- ergy or water savings. For Freddie Mac, the requirement was a minimum of $350 per unit of green improvements. These upgrades encompass a menu of options like low-flow showerheads and toilets, efficient thermostats, kitchen and bath sink aerators, lighting fixtures and up- dated irrigation systems. In exchange for investing in green improvements via Fannie Mae or Freddie Mac, borrowers get a few basis points taken off their interest rate on the back end. The agencies' risk-sharing lenders have aggressively pursued this line of business since the agencies formed their green programs — Fannie Mae in 2013 and Freddie Mac in 2016. Acting as overseer, the FHFA had given the agencies free rein in the green space by excluding those deals from the lending cap. But now there's clearly more runway for energy and water savings since the programs have prov- en popular with borrowers in recent years. "Borrowers generally will go green when they have the opportunity to," says Mitch Sinberg, senior managing di- rector of Berkadia's South Florida office. Going into this year, multifamily lenders weren't sure how FHFA's new requirement would affect demand, but so far borrowers are still actively pursuing green deals. "We were concerned that FHFA's tweaks might re- duce the amount of green financing we do, but frankly it still seems to make sense for our borrowers," says Peter Donovan, executive managing director of CBRE Capital Markets. "Even with the more stringent qualification require- ments, the green product remains highly desired in the marketplace, and this is very good news," adds Frank Lutz, executive vice president and chief production of- ficer of Arbor Realty Trust Inc. Fannie Mae is coming off a year when the agency closed $27.6 billion of green financing, a little over 40 percent of the GSE's overall market share. "2017 was absolutely the year of green," says Phyllis Klein, vice president for multifamily customer engage- ment and marketing at Fannie Mae. "We partnered with public agencies and lenders to do the business and do it right. We've made it the new standard in multifamily." Fannie Mae didn't scale back when the tweak was in- stalled by the FHFA either. In fact, Klein says that the ra- tio of green activity is closer to 50 percent now after the minimum threshold was raised by the FHFA. "Year-to-date we've done almost half of our business in green," says Klein. "The increase from 20 to 25 percent will have a greater impact at the property level for people who live there, and it will have minimal impact on bor- rowing activity." Freddie Mac's green business in 2017 totaled $18.7 billion, a 467 percent increase from the inaugural year of its Green Advantage program. For 2018, David Brickman, executive vice president and head of Freddie Mac Multifamily, expects the agency to close roughly the same amount. (Neither agency had yet officially tabu- lated its green loan totals for the first quarter as of this writing.) Lenders are confident that the agencies' green pro- grams will continue to be active for the foreseeable fu- ture because the loans provide a win-win situation for all parties involved. "In the end, the environment benefits from energy con- servation, borrowers benefit by having their expenses lowered and tenants benefit by having new and better fixtures in their units," says Lutz. — John Nelson AGENCIES CONTINUE TO PUMP UP GREEN BUSINESS DESPITE FHFA TWEAKS Foschini Lutz Randall Sinberg continued on page 45

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