There Will be Shortfall of Supply When Recession Ends in 2011

Steve Bram is president and co-founder of George Smith Partners, Inc. An expert on multifamily finance, he has personally arranged over $2.5 billion of financing in over 150 transactions during his 25 years at GSP, including all types of construction, bridge and permanent financing on commercial and residential properties along with joint venture and equity placements. Bram is also active in community affairs, having served as chairman of the Real Estate and Construction Division of the Jewish Federation of Los Angeles. He talks to MHN Online News Editor Anuradha Kher about how the Obama Administration’s policies will impact multifamily financing, why there will be a shortage of apartment supply in 2011 and the impact distressed and foreclosed properties are having on the multi-housing sector.MHN: There are now reports that sales in the condo market are up. How will this impact availability of financing in the multifamily sector? Bram: There has been an ongoing fear that the “shadow market” of unsold condos flooding the market as rentals would further impact the already declining rental market in many communities. It was believed that many of these unsold condos would not be sold for many years and that they might be sold in bulk by lenders at very low sales prices, allowing them to be rented at very low rental rates. Now that the prices for housing, including condos, seem to have bottomed, there is hope that the impact of the shadow market rentals will be reduced or at least will not further impact declining rental rates. MHN: Some in the industry believe that demand in 2011 (because of the echo boomers) will exceed supply. Is this what you have been hearing? Bram: Yes, absolutely. Construction of new apartments has all but stopped because construction financing is almost impossible to obtain. And due to the recession and the resulting job losses, demand for apartments has been reduced, causing apartments rental rates to decline, and vacancies to increase. This has also made many proposed multifamily projects uneconomical. The supply of apartments needs to constantly grow due to obsolescence of older properties and the ongoing growth of the population. However, when the recession ends and employment grows again, workers, including echo boomers, will start looking for apartments. And the supply will have stopped growing, or even decreased. There will be a shortfall of the apartment supply when the recession ends, which is expected to occur by 2011. MHN: Why aren’t lenders waking up to this opportunity? Bram: While lenders clearly understand that there will be demand for apartments in a few years, they are unwilling to make any construction loans today, except maybe to their best customers in rare situations. This is because their portfolios are stressed in other areas due to the decline in the value of commercial real estate and the delinquencies caused by the slowdown of the economy. Loan officers are looking to be very conservative and don’t want to be responsible for any perceived aggressive lending. MHN: What impact, if any, have Obama’s policies had on financing on the multifamily sector? Bram: Certainly the government’s continuing support of Fannie Mae and Freddie Mac has allowed the multifamily sector to remain the strongest of all commercial real estate sectors. And their continuing support of HUD [U.S. Department of Housing and Urban Development] has allowed a limited amount of specially underwritten construction financing to occur. The hope is that the government’s support of the banking system will result in a loosening up of lending by commercial banks. TALF and other programs were designed to “jumpstart” commercial lending. However, we don’t see this happening yet by banks. MHN: When is new construction financing likely to come back? Bram: We don’t really know. On a very limited basis, some construction financing for smaller loans may now be available for very high net worth bank customers on a recourse basis. But construction financing will not be available on a more wide basis until banks believe the worst is over in their recognition of problem loans in their portfolios. MHN: What impact are distressed sales and foreclosures having on the kind of financing available for multifamily?  Bram: There is a limited impact from distressed sales and foreclosures in the multifamily sector. Problem assets are typically those that were overleveraged. With reduced rents and higher vacancies, these assets are being de-leveraged through discounted payoffs and foreclosures. Once these “hits” have occurred, these properties will stabilize based on their new proforma NOI’s and new higher cap rates. Fannie Mae and Freddie Mac financing is equally available for refinancing of conservatively financed assets or for the financing of assets being sold as distressed sale or foreclosures.