UPFRONT: NEWS

APARTMENT FINANCE TODAY • MARCH 2008

Increased Apartment Demand, Notes NMHC Quarterly Survey

The mortgage crisis and its resulting economic fallout are having mixed results on the multifamily industry, according to the National Multi Housing Council’s (NMHC) latest quarterly survey.

Even though sales volume is down and less equity is available, apartment demand is getting a boost from the housing slump.

“The apartment industry is clearly benefiting from the downturn in the for-sale housing industry,” said Mark Obrinsky, NMHC’s chief economist. “While the ‘shadow’ rental market may attract some apartment renters, thus far, the lowest homeownership rate in fiveand- a-half years seems to have increased demand for apartment residences.”

It also helped that multifamily developers have not been overbuilding, Obrinsky added.

Nearly 80 percent of survey respondents noted that the credit crunch has kept renters in their apartments and out of homeownership.

One surprising result was the significant improvement in the Debt Financing Index of the survey. Forty percent of respondents indicated borrowing conditions were worse, while a quarter said they were unchanged. These responses point to the tightened underwriting standards and the iced-over commercial mortgagebacked securities market. Twenty-nine percent of all respondents indicated borrowing conditions were better this quarter, up from 20 percent from the previous quarter.

The current economic climate is having the most impact on sales volume.

The survey’s Sales Volume Index was below 50 for the ninth consecutive quarter. For January 2008, the index reading was 18, increasing from 12 in October 2007. Although this is an improvement, the score is the second lowest figure in the history of the NMHC survey. A Sales Volume Index reading higher than 50 indicates that sales volume around the country is increasing; a reading below 50 indicates that sales volume is decreasing. A reading of 50 indicates that market conditions are unchanged.

Find survey results at www.nmhc.org/goto/ QuarterlySurvey08.

Property Insurance Goes Green

Reimer Insurance Group, an independent insurance agency based in Miami, is offering “Green Card” coverage, a type of property insurance for owners of buildings who are in the process of making green upgrades, have green-certified property, or expect to make green improvements in the event of loss.

The coverage is provided through the Fireman’s Fund Insurance Co. and is available to owners of multifamily properties.

The “Green Real and Personal Property Upgrade” will cover owners of buildings for the cost of making certain green improvements. The “Certified Green Building Coverage” will permit owners of Leadership in Energy and Environmental Design or Green Globes-certified buildings (green tourism and leisure properties) to make repairs that meet green qualifications.

Lenders Express Concern at Annual MBA Conference

Orlando—The mood at this year’s Mortgage Bankers Association (MBA) CREF/Multifamily Housing Convention was one of worry, as the lack of investor confidence in the capital markets continues to slow the pace of business.

Conduit lenders expressed cautious optimism that the market for commercial mortgage-backed securities (CMBS) would return by the end of the year, while lenders affiliated with the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac were the belles of the ball.

“Prudence took a vacation, and then she came back” is how Shekar Narasimhan, a managing partner at Beekman Advisors, Inc., characterized the current state of the debt markets.

Indeed, the lending industry’s return to historical underwriting standards has favored GSE lenders. Fourth quarter CMBS originations were down 31 percent compared to the fourth quarter of 2006, while the GSEs saw an increase of 41 percent during that time, according to Jamie Woodwell, MBA’s senior director of commercial/multifamily research.

Fueled by that second-half surge, Fannie Mae and Freddie Mac both announced record 2007 volumes at the conference, at $60 billion and $44.7 billion respectively.

Freddie Mac’s multifamily chief, Mike May, surprised the conference by informally announcing at a panel session that the company is prepping a conduit execution of its own. (For more on Freddie Mac, see page 12.)

The question on everyone’s mind at the conference was: How long will it take for the CMBS market to return? “We’ve had an unbelievable run,” said Kieran Quinn, chairman of Column Financial, Inc., a formerly active conduit lender. “We’ve gone full guns, full bore for 15 years, so this pause is not going to kill anybody.”

Quinn believes the CMBS market will be back by the fourth quarter. But Freddie Mac’s May and his counterpart at Fannie Mae, Phil Weber, said the CMBS market is more likely to come back in the middle of 2009, or later.

Fallout from the single-family subprime meltdown will continue to affect multifamily deals through the year. Cities such as Las Vegas and Miami that have large “shadow markets,” or an overabundance of unsold condos and single-family homes, were often cited as sources of concern for lenders.

“Long term, we’re very optimistic on multifamily,” said Weber, senior vice president of Fannie Mae’s multifamily division. “In the short term, the big issue is going to be, how does the single-family supply impact the multifamily business?”

MBA chief economist Douglas Duncan predicted the single-family housing crisis will hit bottom in the third quarter of this year, and believes interest rates will remain low through the first half. “It may well be the largest downturn that we’ve seen in modern times,” he said. “But it was preceded by the greatest expansion in modern times.”

The return to sound underwriting fundamentals was seen as a net positive for the lending community. “We had this rising tide lifting all boats,” said Woodwell. “Now we’re seeing differentiation again, where individual markets and individual properties are key.”

Liquidity for multifamily deals will be more readily available than for other types of commercial real estate through the year, according to industry participants.

“Despite the lack of debt capital, there is still plenty of equity capital out there” for multifamily deals, said Bob White, founder of market research firm Real Capital Analytics. “The multifamily market is still very competitive.”