COVER STORY, SEPTEMBER 2011

SHOWING MULTIFAMILY THE MONEY
Lending for multifamily is strong.
Savannah Duncan

As the end of summer approaches, the multifamily lending market continues to heat up. The Mid-Atlantic region is among the best, but the more Southern states aren’t far behind. Fannie Mae, Freddie Mac, FHA and insurance companies are experiencing strong activity and are expected to continue to prosper during the coming months. Southeast Real Estate Business spoke with lenders throughout the Southeast, including Skip Martinson, vice president of multifamily for PNC Real Estate’s Southeast region; John Edwards, vice president for Arbor; John Beam, managing director for Centerline Capital Group; Randy Wolfe, senior vice president and senior director for NorthMarq Capital; Hugh Allen, senior vice president and division manager of middle market real estate for Wells Fargo; and Mike Wallace, senior vice president at M&T Bank.

SREB: How is the overall multifamily lending climate in the Southeast right now? What about your specific market?

Martinson: The lending climate for multifamily is quite positive throughout the Southeast and it’s largely driven off of market fundamentals. There has been strong net absorption and rent increases even with marginal economic and job growth. There are still some markets exhibiting weakness such as Atlanta and Jacksonville, which have consistently lagged the Southeast and the country. Even those markets have experienced positive net absorption and rent growth recently. A year ago, four markets, Atlanta, Charlotte, North Carolina, Jacksonville, and Orlando had double digit vacancy rates. Today, those markets have now dropped below 10 percent.

Edwards: We are seeing increased competition for permanent financing — clearly an increase from 2010. Overall, if you are looking for permanent financing and you are an experienced multifamily owner/operator, you have financing options. We are optimistic in the Carolinas. Although South Carolina has significant increase in the unemployment rate along with higher property taxes, the demographics hold up well, so there are signs of continued strength in that market.

Beam: We have a generally improving market, driven by a number of things including job outlook. We’re not continuing to lose jobs, we’re starting to break even or pick up a few in certain areas. Markets such as Atlanta and Florida are seeing some signs of recovery.

Wolfe: Multifamily is the preferred asset class, no doubt. It’s the strongest segment in terms of occupancy in spite of the fact that we’ve had minimal job growth. There’s still population growth so that puts demand back in the equation, combined with the fact that there has been minimal new supply for the past 2 years.

Allen: We are seeing a lot of activity. Probably 70 percent of what we are doing is related to multifamily on new originations. We’re doing deals in a variety of markets, including Charlotte, Charleston, South Carolina, Virginia Beach, Virginia, and Columbia, South Carolina.

Wallace: Our market, from Delaware to Richmond, Virginia, is probably one of the better ones in the country right now. The climate is good and activity levels are up. We’re still seeing the benefits of the BRAC initiative, which has been a big influence in our market.

SREB: Who are the most active lenders or types of lenders?

Martinson: Multifamily remains the asset class of choice and there continues to be an array of capital sources for it in the market. The agencies (Fannie Mae, Freddie Mac and FHA) largely had the field to themselves for several years. They still dominate multifamily lending but we have seen increased competition from other sources. This past year, life companies and conduits have re-entered the market. Life companies in particular have increased their allocation for multifamily lending in 2011. Although they’ve traditionally focused on larger, low leverage loans on Class A properties, we’ve seen them compete on a wide spectrum of deal sizes and leverage levels. For larger, high-profile deals, they can be very aggressive with pricing. With the recent market volatility with CMBS spreads, it remains to be seen how active conduits will be the remainder of the year and whether they can compete with agencies.

Edwards: The CMBS market struggled in the second quarter because of widening spreads. Insurance companies have been quite active so far this year as well. Additionally, banks are actively providing aggressive terms because of their low cost funds.

Wolfe: The agencies are quite active. Insurance companies would like to get some apartments but they are having a hard time competing for business with the agencies, primarily because of lower loan proceeds.

Allen: We have seen some regional banks come into the Southeast and open up shop. We’re seeing some community banks that are still active and lending when they are hopped up on a deal they really want. For the high quality deals where you’ve got institutional equity coming in and good sponsorship with 25 to 35 percent equity coming in, the competition has been pretty stiff with as many as three banks looking at a deal.

Beam: Fannie Mae, Freddie Mac and FHA have been active. Primary agency lenders have not only continued to stay in business, but have actually been prospering this year.

SREB: What kinds of deals are being made? Has there been any new development?

Wallace: In our market, we’re seeing a lot of office space being built in BRAC areas which will be leased to government related or government contractor businesses. So, in Washington, D.C., and Baltimore, we’re seeing a lot of apartment products being built. There has been a lot of pent up demand. Most of our deals have been construction with a couple of properties that are being repositioned.

Beam: Primarily, we’re looking at acquisitions, refinance, equity buyouts and maturing CMBS. There are a lot of small apartment loans that are maturing. In stronger markets like Washington, D.C., we’re seeing a tremendous amount of acquisition activity. There are also opportunities right now for partners to buy out their other partners who want to get out of the business.

Martinson: Nationally, acquisition activity has picked up substantially this year, with a first half 2011 volume up over 100 percent from the same period in 2010. Similar trends have occurred in the Southeast. As a result of this uptick in transactions, acquisition financing activity has picked up. There is strong demand for quality product in primary and secondary markets. A high percentage of trades in the Southeast, particularly Class B and below continue to be distressed.

Wolfe: Investors are buying product in many cases below replacement cost and they are buying it because the economy has been depressed the past couple of years. They are thinking if job recovery occurs, there could be a significant jump in rents and therefore returns in fairly short order.

SREB: What are some of the concerns lenders have?

Allen: Job creation is a key concern. Also, sustainability through transactions and making sure that people don’t have any surprises in their portfolios with other banks. If we have a client that has a good relationship and loan portfolio with us, they could still have a troubled asset out there with a bank that is in deeper trouble. We have to connect the dots more thoroughly than we did in the past.

Wallace: Our biggest concern is the economy, the unemployment rate and what’s going on in the nation’s capital. There’s a concern about another slowdown in the economy, which we can’t afford.

Edwards: A persistent level of more than nine percent unemployment is problematic because you have tenants losing their jobs and having to move out. Furthermore, the unemployment limits rent growth because we haven’t seen wage inflation. Instead of trying to squeeze out an extra $50 to $100 a month on their lease renewal, that tenant may move out and go to a cheaper apartment. Rent growth concern and potential increase in operating expenses, and specifically real estate taxes, is a factor in the loan sizing, especially considering the loan exit risk.  

SREB: What do you anticipate for the next 6 to 12 months?

Wolfe: I would expect, barring any major upheaval, things will continue to chug along.

Wallace: We anticipate continued improvement. We have a fairly decent pipeline that we feel pretty good about for the next 6 to 12 months in terms of the abilities to do deals and we’ve actually seen some uptick in our lending during the past 16 months.

Edwards: Once we achieve improved employment trends and stability in our economy, we’re going to see better traction on rental increases. It’s anyone’s guess where interest rates will be, but we’ll continue to provide multifamily financing for strong multifamily owners and operators. If you are a strong multifamily owner/operator with stable occupancy levels despite economic difficulties, you’re going to get financing and, at least for the moment, at very attractive rates.

Allen: We’ve got great expectations for growth in the Southeast. We’ve been picking up a lot of new clients because banks or traditional capital sources have slowed down their origination activity. So that’s been a great opportunity for us and we look forward to capitalizing on that.

Martinson: If the economy can continue to grow and interest rates remain stable, the financing environment should remain on a positive footing.

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