SPECIAL REPORT: Banks Vigilant on Possible Future Overbuilding in Apartment Markets

Construction lenders raised concerns about the possibility of future overbuilding in multifamily markets at the Mortgage Bankers Association's Commercial Real Estate Finance/Multifamily Housing Convention 2012, which opened yesterday in Atlanta.

By Keat Foong, Executive Editor

Atlanta—Construction lenders said they were keeping an eye on the possibility of future overbuilding in multifamily markets, during the Mortgage Bankers Association’s (MBA) Commercial Real Estate Finance/Multifamily Housing Convention 2012, which opened yesterday in Atlanta. The financiers were speaking on the panel titled “Lending for Bank Portfolios—Easy Does it or Rocky Road?”

Ken Broussard, regional executive of the Income Property Group of KeyBank, said the bank has had conversations questioning whether there is “too much development or structures that can cause a bit of a bubble in multifamily.”

“No one is saying ‘yes, probably,’ but at least there is a discussion, because across the country all of our regions are seeing a lot of requests on new construction in multifamily,” he said. Broussard said 60 to 62 percent of the group’s new originations in 2011 were in the multifamily sector, primarily in permanent debt.

In particular, Washington, D.C. was singled out by the panelists as a market to be cautious about. Broussard said that the multifamily markets in Washington, D.C., and Baltimore are still holding up pretty well, but that there is much discussion about possibility of overbuilding in those markets. “We are seeing a ton of construction in Washington, D.C. and New York. The gateway cities are huge right now,” agreed Pete Matthews, Jr., senior vice president of M&T Bank.

Marc McAndrew, executive vice president of PNC Real Estate, said there could be too much supply in both Washington, D.C. and Seattle if all the projects that are discussed are brought to fruition. While he noted that all markets are submarket specific, McAndrew added that Texas should also be monitored, as it is easy to buy land in the state to develop real estate. The supply and demand balance of multifamily housing is currently “pretty good” in Texas, but could disappear pretty quickly, he said.

While the lenders expressed concerns, they also said they intended to maintain, if not increase, their level of lending activity this year, whether in the areas of permanent or construction debt. “A lot of 2011 for many of us was continuing to cope with the residual of the financial crisis and the recession, but we are looking forward to getting some new loan growth,” said moderator Diana Reid, executive vice president of PNC Real Estate.

Matthews said M&T Bank will be focused on serving its customers and their liquidity needs this year. “We are taking advantage relative to 2011 of getting some new opportunities with different partners,” he said. He said the bank will provide construction capital and bridge financing, in “the right structures with the right players.”

In terms of lending to the different real estate sectors, Matthews said M&T bank is making some retail construction as well as refinance loans. Development in the retail sector, he said, is so difficult that there is no great oversupply. The office market is “lukewarm,” but the bank would lend in the right situation, while industrial properties are generally steady. M&T has also started providing capital for condominiums in New York City again, he noted.

McAndrew said PNC Real Estate is targeting $8 billion to $9 billion in new product this year, spread across construction, REIT and permanent financing.

As to favorite markets, the panelists unanimously agreed that New York City was the most desirable market in which to provide debt capital. It is difficult to overbuild in New York City, said McAndrew. In addition to Pittsburg, McAndrew said he also favors certain multifamily submarkets in Washington, D.C.

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