Prudence Returns to Multifamily, Commercial Markets Says MBA

By Suzann D. Silverman, Editor-in-Chief, Commercial Property News“Prudence Took a Vacation, and Then She Came Back” is what moderator Shekar Narasimhan, managing partner of Beekman Advisors Inc., nicknamed the multifamily session “The Music Stopped: Who Has a Chair?” at the Mortgage Bankers Association’s Commercial Real Estate Finance/Multifamily Housing Convention & Expo, and it was a fitting title. Generally, the speakers agreed that while the commercial and multifamily markets can expect some pain, especially given a number of unknowns to come, the credit crunch and single-family fallout have proven to be more of a much-needed wakeup call than anything else. That’s not to say there won’t be some interim pain. After about five years of 40 to 60 percent increases in investment activity, the bull market has ended, affirmed Real Capital Analytics president Robert White Jr. during an introductory economic briefing. Last year’s record year for property sales was mostly due to portfolios and privatizations, with one-off sales actually declining even before the August crunch hit. Most property types suffered declines, although the apartment market saw an increase. Indeed, while cap rates overall saw an inflection point in September, he noted, the multifamily market experienced its correction back around the end of 2005, when the condominium converters disappeared. Multifamily pricing has remained fairly resilient compared to other property types, which have seen an overall increase of 100 to 150 basis points since the summer. (That increase would have been even greater, but Treasuries are much lower than they were this summer, reducing the gap.) Flex, retail and office pricing has been most affected. The good news, White noted, is that there is still plenty of equity capital in the market. He listed among interested players institutions (with large pension fund investment planned for this year, according to a Kingsley Associates report, although one investor later in the day reported hearing of current overallocations toward real estate due to the stock market’s recent falloff), global investors (despite some continued skittishness about our economy), REITs (now quietly increasing their acquisition lines) and in-state private investors. Speakers that followed emphasized solid fundamentals and low delinquencies as positives. “We’re going through a repricing period of risk,” acknowledged Kieran Quinn, chairman of the MBA and of Column Financial Inc., but while delinquencies may even triple, the resulting number will still be low, he said. Furthermore, he added, “your CMBS lenders will be back. … The world will look a lot different in September. Hopefully in April, May or June it’ll look a lot different.” That said, job growth and the retail market remain wild cards, he warned. With Freddie Mac and Fannie Mae both announcing record 2007 multifamily rental volume yesterday (Freddie with $44.7 billion and Fannie with $60 billion), Freddie Mac senior vice president of multifamily sourcing Michael May also pointed to low delinquencies and noted that although financing and capital costs are up and credit risk has increased, “I applaud the return to sound fundamentals, and I think that’s where we are now.” Three big issues to come: a flight to quality that will cause greater differentiation in cap rates between different types of markets (he offered New York City and Albuquerque as an example), an overabundance of shadow space to be dealt with and potential negative effects on properties surrounding the bad deals that will emerge from bets over the past two years on a strong economy. Fannie Mae senior vice president of multifamily Phillip Weber sees lessons from the single-family business, where people were putting zero down and getting negative amortization as well as being verified in the same way whether they had no assets and no income or invested 20 percent equity in their purchases. “That is not the fundamentals of lending,” he affirmed. Speaker Sam Davis, senior managing director for Allstate Investments L.L.C., offered more negative insights. He expressed concern over deteriorating fundamentals and markets with an overabundance of new supply, predicting more defaults to come. And while the life insurance industry is generally said to be an active lender now, “my instinct is that’s not going to happen,” he declared. Influencing life company activity are reduced cash flows, weak product sales and management’s concern about the economic situation, he said. That said, “if the market doesn’t come back, you’ll see development of new vehicles,” he added.  For more coverage of this conference by our sister publication Commercial Property News please go toCommercial Property News or click on the stories below:  SPECIAL REPORT: MBA Finds Decreased Originations, Predicts Future Changes  SPECIAL REPORT: Prudence Returns to Multifamily, Commercial Markets, Says MBA