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Fannie Mae exec: Multifamily lending is in good shape


It continues to be a good time to be a commercial and multifamily loan originator, although 2019 production levels are expected to plateau, according to estimates from the Mortgage Bankers Association (MBA).

The trade group released its 2019 origination forecast during this week’s MBA Commercial Real Estate Finance/Multifamily Housing Convention and Expo in San Diego. Commercial and multifamily loan volumes were expected to reach $530 billion this year, roughly on par with the $526 billion volume recorded in 2018. 

HaywardMuch of that volume, of course, can be chalked up to the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. Jeff Hayward, who has served at Fannie Mae since 1987 and has been the agency’s head of multifamily since 2012, spoke with Scotsman Guide News during the convention about the agency’s big-picture plans for 2019.

What concerns do your lenders have about the coming year? Is there an end in sight for this commercial real estate cycle?

[For] everybody who went through the cycle in ’06, ’07, ’08, everybody knows that cycles exist and they know that, eventually, the euphoria will stop. For 2019, no lender really is thinking that this is the year that will happen. 

Now, why do they think that? For a couple reasons. The first is, the underlying demographics are still in everybody’s favor. The millennial class — there are [approaching] 80 million of them, more than my generation. I’m a baby boomer. And that’s really the driving force behind rental demand. 

Now, there are some indicators of some return to normal. If you look at things like rent growth, rents are not going to grow as fast in ’19 as they grew in ’18. There’s a reason for that — because it could not sustain the growth that was going on. And frankly … I’m kind of glad to see it slow down a little bit, because rent growth isn’t that much of a problem if you’ve got the income. You can handle it. But for people of more modest means, rent growth is a problem. 

Vacancy rates will be between 5 ½ and 6 [percent], which is about normal. That doesn’t spell alarm. I look at concessions: Let’s say an 8 percent concession is equal to one month’s concession. Concessions are running at about 2 percent — less than a month. … That tells you that the fundamentals of the business are just fine. 

The banks are back doing construction loans. … If banks are feeling comfortable doing construction loans, that tells you you’re in a pretty good place, because when they’re not, they stop. They stopped for a long time.

Is the rising interest rate environment having a negative effect on multifamily housing right now? If not, will that happen in the near future?

Interest rates obviously have an effect on what happens in the market. But, so far, at the level we’re at right now — with the 10-year Treasury being between 2 ½ and 3 percent — at those levels, I think people can do business. Now, if the 10-year Treasury is at 7 percent, that’s a whole different deal. 

I don’t foresee where rates alone will really change the market, unless they go up substantially more. There was a little bit of a slowdown early in the fourth quarter of 2018 when the 10-year Treasury jumped a little bit above 3 [percent]. There was somewhat of a slowdown, but it wasn’t that much of a slowdown and it didn’t last. 

Fannie Mae’s green-loan programs have taken off in recent years. Is it reasonable to expect similar growth in the next few years?

I mean, there’s a finite number of apartment buildings, so at some point you will get to the point where everything has been dealt with and treated. I think, naturally, if you just did the math on how many apartment buildings there are and how many have been treated by green, you’re going to slow down a little bit. 

But I think it’s incumbent upon us to find new ways to not just have water and electricity savings, but other things, and I think we’ve got a few things we’re thinking about in that way. I think that program will continue to be a steady, stable way we do business. There will be some owners who prefer brown and don’t want to do green. I think the large majority of them, just buoyed by the savings, will want to go green. 

The reason we love green, it’s a double-win situation. The owner wins because the expense to run their apartment building is less. The tenant wins because anything that cuts the owner’s expenses cuts the owner’s opportunity to raise their rents. So, it can control rents and, as we estimate the savings, it’s about $150 per unit [per year]. That’s not insignificant savings for those people who are of modest means.

What are your thoughts about the GSE-reform proposals on the table? Is there an argument that the current conservatorship structure works?

The way we run our company is we have to, every day, innovate and deliver for the taxpayer. And we will await policymakers to tell us what to do. Our job is to run our companies the best way that we can run them and then be prepared when the policymakers say shift left or shift right.

What is a successful multifamily business? A 30-year, risk-sharing, skin-in-the-game program has got to be something that policymakers look at and say, “That’s something that’s really good and we want to try to preserve it.” You think about what happened with Dodd-Frank, [it] was all about having everybody share in the wins and losses. 

Our business, the DUS (delegated underwriting and servicing) business, is everybody sharing in the wins and losses. We didn’t invent this yesterday. We invented it 30 years ago and it still works. So, I think we have something that policymakers can look at and say, “That’s the North Star of how things could be, how good things might be.”

What do you think about the opportunity zones created by 2017 tax-reform legislation? Is it too early to know how Fannie Mae can be involved in this space?

The thing that, conceptually, all of us are really looking forward to is, any opportunity to put capital in places that have been starved for capital for decades is a place we want to be. Now, why do we want to be there? Because our job is to make sure that everyone in America can have housing. And if there’s going to be other capital that goes into these areas that need the capital the most, we should be there with our long-term debt capital. 

So, if others, because they see the tax breaks as being a reason to put their capital in that [market], and it happens to be a [market] that has been depressed forever, and there’s a chance to improve the lives of people there … we should be part of the solution. So, I’m waiting for the details and the fine print. I’m waiting to see what the primary-market actors do. But I’m encouraged by the concept, because I think the concept is fascinating. If you can bring capital, through tax incentives, to a place that otherwise wouldn’t get capital, to benefit people who really need the help, that’s a win. 

Think about the Low-Income Housing Tax Credit program. It’s just like opportunity zones. In essence, it uses the tax code for the benefit of people who otherwise would get no help. You bring private capital in to help. We just got back in that business last year. I’m so proud of that. We’re going to create [housing] units for people who wouldn’t have any. 

Questions? Contact Neil Pierson at (425) 984-6038 or neilp@scotsmanguide.com


 

Questions? Contact at (425) 984-6019 or arniea@scotsmanguide.com.

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