What Housing Bubble? A Torrent Of Lending Is Surging Into U.S. Multifamily Sector

The continuing surge of debt financing into the U.S. multifamily sector might not match the record totals seen in 2021, but the strongest apartment fundamentals in a generation mean that the lenders probably aren't going to put on the brakes in 2022, experts tell Bisnow.

Lenders may tinker at the edges of their underwriting standards as interest rates climb or the economy weakens, but the demand for multifamily products is too strong to pull back, even as talk of a valuation bubble circulates in the sector.

"Lenders are coming off their best year in history, but still plan to do more business in 2022, and many have increased allocations," CBRE Senior Managing Director and Head of Multifamily Debt Production Kelli Carhart said, adding that there is plenty of debt capital available, but there are also plenty of opportunities, allowing lenders to be a bit more selective.

Multifamily lenders are in a strong position, Carhart said, considering the tumult in the wider economy.

"There’s also a lot of economic uncertainty, which means lenders can name their terms," she said. "Each lender seems to have their niche or bucket in which they want to lend. It may take more time to place a deal today, but [there] are still options."

Some lenders have expanded their debt yield requirements, tapering lease trade out assumptions, or focusing on debt-service coverage ratios versus debt yield, Carhart said.

"Still, it’s important to remember that leverage levels are down significantly with the large increase in the cost of debt capital — 60% LTV or less," she noted.

In April, the Federal Reserve reported that banks didn't change their underwriting standards during Q1 for most commercial real estate loan categories, except for those secured by multifamily assets, for which they eased standards as demand strengthened.

Such easing included increasing the maximum loan size and lowering the spread on loan rates, increasing the maximum loan maturity and the length of interest-only payment periods, and lowering minimum debt service coverage ratios, reports the central bank, which surveys banks doing business in the U.S. every quarter about their CRE lending practices. 

Though mostly active in the affordable housing sector, the GSEs are also impacting the multifamily lending market by angling to be as competitive as possible, entertaining more aggressive income and expense underwriting in certain circumstances, Greystone Senior Vice President, Agency Production Vince Mejia said. 

"Examples include lowering debt-service coverage ratios and alternate exit loan analysis, all in an effort to increase proceeds and make agency financing more competitive," Mejia said. "Acquisition financing has been impacted with the rise in rates and low cap rates, driving loan proceeds down in the 55% to 65% LTV range." 

Altogether, Fannie Mae provided nearly $70B in financing to support the multifamily market in 2021, and funding of affordable multifamily rose more than 23% last year to the highest volume in the history of the GSE's 33-year-old Delegated Underwriting and Servicing program. 

As financial service companies are keener to lend on multifamily, developers and investors in the sector are keen to take them up on it.

The volume of multifamily mortgage originations nearly doubled during the first quarter of this year compared to 2019, according to Mortgage Bankers Association data. In Q1 2019, MBA's origination volume index stood at 389, where 100 equals the average volume of the four quarters in 2001. 

In Q1 2022, the index came in at 665. Though multifamily originations tend to follow a seasonal pattern — volume is typically lower in the first quarter of each year — the index in each quarter of 2021 outpaced the same quarter in 2019. 

“The continued growth in lending activity is the result of the ongoing strong demand for certain property types like industrial and multifamily," MBA Vice President of Commercial Real Estate Research Jamie Woodwell said in a statement.

The rise in interest rates ought to take some wind out of the sails of borrowing in upcoming quarters, but strong market fundamentals, property values and investor interest should continue to support the market, Woodwell said.

As markets go, multifamily is about as hot as possible.

The median monthly asking rent in the U.S. increased 17% compared with a year ago to a record high of $1,940 in March, Redfin reports. Rents rose in parallel with median monthly residential mortgage payments, which were up 34% year-over-year.

Last year and into this one, rents grew like Topsy, because of strong demand, but also because of the rising cost of buying a place to live. 

“The growth in mortgage payments has been driven by both climbing prices and climbing mortgage rates,” Redfin Chief Economist Daryl Fairweather said. “And those rising mortgage costs push more potential homebuyers into renting instead, which pushes up demand and prices for rentals. Mortgage rate increases are accelerating, which will cause both mortgage payments and rent to grow throughout 2022.”

Moreover, the spikes in rent weren't confined to traditionally expensive places, such as New York or San Francisco, but were spread nationwide.

Of the top 30 metros surveyed by Yardi Matrix, apartment rent growth was up at least 8.8% over the last year in all but one. In May, the company reported that rent growth was positive in each of the top 30 metros over the last one-month, three-month and 12-month periods.

Overall, the U.S. multifamily vacancy rate fell by 20 basis points during the first quarter of 2022 compared with the previous quarter, and 2.5 percentage points year-over-year to a record-low 2.3%, CBRE reports, data that encourages investment.

Multifamily investment volume in Q1 2022 increased by 56% year-over-year to $63B — the strongest first quarter on record, CBRE reports.

Developers are encouraged as well. New construction deliveries of 66,400 units in Q1 2022 brought the four-quarter total to 292,500 units, which is the highest number since 1987, according to CBRE. With more than 400,000 units currently under construction, 2022 deliveries are expected to eclipse 2021.

"The fundamentals in multifamily continue to be extremely strong," CBRE's Carhart said. "That's going to continue to position the sector to be a favored asset class within the lending community."