Entering 2020, many industry experts projected the multi-housing sector would have its biggest year ever in terms of sales and financings. This all came to a screeching halt in March 2020 as COVID-19 brought the world and economy to a standstill. With almost $200 billion of dry powder as of year-end 2019, there was ample liquidity on the equity front, but there were concerns amongst investors about how to underwrite properties with millions of renters filing for unemployment weekly, coupled with the quickly evaporating debt markets.
Fannie Mae and Freddie Mac, who remain steadfast in providing liquidity to the market in good times and bad, made conservative yet necessary underwriting and structure adjustments to keep the multi-housing market afloat during the height of uncertainty at the end of the first quarter and into the second quarter.
With the acquisition market all but frozen, as both buyers and sellers tried to adjust on the fly, many investors moved quickly to refinance properties to take advantage of historically low interest rates almost exclusively coming from the agencies. Banks shifted their full focus to Paycheck Protection Program and Small Business Administration loans to keep businesses afloat. Life companies all but ceased lending on new business and turned their attention to forbearance and workouts of existing loans heavy in the retail and hospitality sector. Liquidity was nonexistent for debt funds, allowing them to lever their position or move loans off their books via collateralized loan obligations, causing pricing to widen significantly.
Slowly more and more liquidity returned to the market in the second half of 2020. Life companies started pushing to win lower leverage and multi-housing lease-up business. Local and regional banks filled the gap for money center banks and provided capital for construction loans.
The CMBS market became more liquid and pricing seemed to gain more efficiency by the week. Repo lines and the CLO market began to loosen up providing much needed liquidity to the debt-fund space. All along, the agencies continued to plug away dominating the stabilized multi-housing lending space.
As we enter 2021, there is a lot to be optimistic about. The Federal Housing Finance Agency announced new allocations of $70 billion each for Fannie Mae and Freddie Mac, with at least 50 percent being “mission-driven” business. While this is down slightly from the $80 billion allocated for 2020 as part of the $100 billion five-quarter allocation, this should still allow for both agencies to remain competitive and liquid in 2021. Both Fannie Mae and Freddie Mac have evaluated their businesses over the last three years and determined that they have met the new FHFA requirements for each of those years.
Having experienced a down year in 2020, life companies will look to return to the market in a big way in 2021. Having already tightened pricing, life companies are back and competing again with the agencies. Liquidity has returned from money center banks as they have begun to step back in, albeit with more structure than before the pandemic, providing the construction market a much-needed boost. Lastly, the bridge market is still very active in the multi-housing space for both transitional and lease-up deals, with pricing seemingly tightening weekly and closing in on pre-COVID-19 levels.
The economy is on the cusp of a long-awaited return to normalcy as the vaccine distribution began rolling out in mid-December. With historically low interest rates, improving economic figures, and ample liquidity on both the equity and debt markets—both of which are hungry to make up for a down year—2021 is poised to be the record-setting year the market expected 12 months ago.
Jamie Leachman is a JLL Capital Markets managing director.