We all know how important multifamily residential properties and development have been to the overall U.S. real estate recovery. The crushing recession caused cash-strapped residents to seek or remain in rentals rather than buy/own; single-family financing proved difficult during and soon after the financial crisis for many would-be borrowers; a severe shortage of multifamily product boosted values and occupancy while compressing cap rates; and on top of everything else, multifamily was and is one of only a couple asset types eligible for federal funding (I’m not talking about state tax credits or SBA loans or anything like that; I’m talking about Fannie/Freddie money, which is only available for residential projects). All in all, multifamily experienced a perfect storm in the best possible sense in the immediate aftermath of the Great Recession, and its investment/development momentum is yet to subside (though it’s worth noting many ground-floor type multifamily stakeholders are now exiting their investments or considering such a move, which should tell you something…).
But multifamily, like any other major asset class, is much more diverse than its name suggests. Apartments can be luxury or ultra-luxury, market rate, affordable housing, or tailored to a particular group or demographic like families, seniors, or those with special needs. Along with these subsets comes different financing possibilities, different levels of investment and return potential, different levels of market demand, etc.
Here in Philadelphia, as in New York City, as in most major U.S. markets, there is a strong emphasis on building above-market/luxury residential assets (decent demand + hefty returns = a developers dream), usually in CBDs. This is all well and good for a small portion of the population that can afford luxury units in a ground-up or adaptive-reuse asset in a central location, but these prices naturally drive up the market rate overall and create a more difficult rental space for everyone else, even those making around the metro’s median income. This is an even greater crisis for those in need of affordable housing (those with incomes a certain amount less than the area’s median).
Which is why it’s so important that Fannie, Freddie, and their overseeing FHFA are there to buy and hold debt connected to not only affordable but market-rate residential properties as well. While the spectacularly wealthy (including many anonymous foreign investors, which is a whole other story) can drive the luxury/upscale multifamily market themselves, those who depend on affordable residences depend also on the federal capital that flows through the GSEs (for however long the GSEs are around, which has been an uncertainty for years now and is yet to be resolved).
Fannie Mae and Freddie Mac each purchased more than $10 billion of multifamily loans in the first quarter of 2015, providing financing for more than 274,000 apartment units. The problem is, both GSEs operate under a $30 billion annual cap on such purchases. At their current pace, Fannie and Freddie would hit their caps by the third quarter, leaving no money available to finance deals in the latter half of the year.
Their overseer, the Federal Housing Finance Agency (FHFA), came to their rescue this past week, revising the affordable housing lending categories that are excluded from the multifamily lending purchase caps.
While the 2015 caps of $30 billion of new multifamily lending for each enterprise will not change, the FHFA tweaked the affordable housing lending exclusions to exclude a pro rata portion of multifamily loan amounts purchased by the enterprises in 2015 from the caps based on the percentage of units in a property that are deemed affordable to renters at 60% of the area’s median income.
And so on. All of which is to say, FHFA is allowing its charges a greater level of exemption for affordable and semi-affordable holdings, which means the GSEs can significantly bypass the mandated cap while still meeting the market’s needs on both the affordable side and the (more or less) market-rate side.