For Newer, Larger Products, There Is More institutional Interest, Says KeyBank’s Clay Sublett

Dees Stribling, Contributing Editor

The economy might be improving, but it’s still a near-universal complaint among commercial real estate professionals that financing isn’t perking up quite as much. In that regard, multifamily is still fortunate to have Fannie Mae and Freddie Mac to keep liquidity flowing.

But the problems of the GSEs are well known. What’s the outlook for multifamily finance as Fannie Mae and Freddie Mac face the prospect of change?

Recently MHN spoke with Clay Sublett, national production manager, KeyBank Real Estate Capital, about the state of multifamily finance and the GSEs. The bank has been quite active in such deals. Not long ago, for instance, Cleveland-based Key provided $16 million in Freddie Mac funds for the acquisition of the 270-unit Treetops Apartments in suburban Seattle.

MHN: Are Fannie and Freddie still the mainstays of multifamily finance?

Sublett: For the most part. Freddie Mac continues to be active in some markets, but it’s pulling back in others because of concerns about those markets. As a result, we’ve seen a substantial increase in our FHA business. Borrowers everywhere are weighing the pros and cons of doing a Fannie Mae vs. a Freddie Mac vs. an FHA, which is basically a HUD guarantee.

Those three executions are still keeping liquidity flowing through the multifamily sector. The decision now for borrowers is which of these is best.

MHN: Is the volume of deals enough now to get a sense of valuation for multifamily properties?

Sublett: In some places. In the Northeast and on the West Coast, for instance, the multifamily REITs have cash, and they’re looking for and making acquisitions. So some of those markets are getting a renewed sense of valuations. Seattle is certainly one of the better markets in the country in that regard.

It was nice to see acquisition financing for Treetops, as opposed to a refinance, because previously there weren’t enough trades to give buyers and sellers a level of comfort. Everyone’s been struggling with that, because it’s been hard to get a hold of cap rates and valuations.

MHN: Are both institutional and local buyers getting back into the game?

Sublett: For the newer, larger products, we’re seeing more institutional interest. But local, non-institutional investors are also in the game again, especially looking for older properties in more secondary markets.

MHN: There’s talk of reforming Fannie and Freddie, and how they do business. How might that affect multifamily lending?

Sublett: The future of Fannie and Freddie is a political issue. In the near term, I don’t expect to see any significant change in the way they do business in the multifamily sector — and by near term, I mean in the next 18 months or even 24 months.

There will be changes eventually, but it’s much too soon to see the shape of those changes — whether they’re fully taken over by the government, or privatized, or broken up in some way, it’s still too soon to tell. Until then it’s business as usual with Freddie and Fannie. They are a dominant source of capital in the multifamily sector, so the formulation of any change is going to be a long process, to avoid upsetting the market.