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Building constraints mediate

Multifamily market agrees there is no bubble

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When an audience of about 100 people at the Manchester Grand Hyatt was asked whether a multifamily housing bubble is forming, only one person raised his hand.

During a Feb. 4 session titled “Multifamily -- What’s Next," government and private lenders addressing this week’s Mortgage Bankers Commercial Real Estate Finance/Multifamily Housing Convention & Expo also concluded the apartment market isn’t heating up too quickly.

This isn’t to say that quasi-government and private lenders haven’t been busy during the past year.

David Brickman, senior vice president of the multifamily division for Freddie Mac (OTC: FMCC) said he is overseeing a $1.5 billion apartment loan portfolio for Southern Management Corp.

Jeffery Hayward, senior vice president of Fannie Mae’s (OTC: FNMA) multifamily mortgage business, said “we probably did 100 deals that were noteworthy last year.”

T. Anthony Premer, who heads the national investment platform for Pacific Life Insurance Co., has helped to bankroll $750 million worth of apartment transactions for his company during the past year as well.

Hayward said total multifamily financing amounted to about $105 billion in 2012, and could approach its 2007 peak level of $143 billion in 2013.

Fannie Mae reported Monday that it and its lenders tallied $33.8 billion in financing for the multifamily market last year.

Brickman’s Freddie Mac announced on Jan. 30 that it had supported a record $28.8 billion in multifamily financing in 2012.

Stephen Holmes, Morgan Stanley’s executive director of commercial real estate lending, who said he is seeing an ever-greater interest in apartments, said purveyors of commercial mortgage-backed securities (CMBS) also want to gain a larger share of the apartment lending business.

Premer said life companies such as his are bullish on the right type of commercial mortgages, and would love to get into many more apartment deals but may have balked over pricing expectations.

None of the panelists seemed worried about the possibility of an overbuilt apartment market, however.

“There could be some delays in absorption, but they would be the exceptions rather than the rule,” said W. Thomas Booher, PNC Real Estate executive vice president.

“We don’t see any multifamily bubble," Brickman added. "The constraints on construction lending and the regulatory environment should moderate that.”

While prices on multifamily complexes are rising once more and capitalization rates in many areas -- including San Diego --continue to compress, Hayward, Brickman and Booher said they don’t believe the low cap rates are unreasonably low.

“You might have a sub 5 [percent] cap rate, but when you analyze that, it makes sense in a given situation,” Booher said.

As for interest rates that seem so low they seem to be tunneling through the floor, Morgan Stanley’s Holmes said they bear watching.

“They will stay low for a while, but once they go up, they will go up faster than ever,” Holmes said.

Multifamily lenders are tending to be much more careful than they were in 2007, but Holmes said there is such a thing as too much caution.

“Now there’s an overemphasis on being protective … Holmes said. “The problem you are trying to solve could create an even bigger problem later on.”

Hayward agreed that a proper balance must be struck between caution and loan availability.

“You could be diligent, and you could ruin a very good thing,” Hayward said.

When asked if large amounts of shadow inventory in the single-family arena could present a problem for multifamily as well, Hayward said he didn’t see that as a threat.

“And if single-family homes are appreciating, that’s good for all of us,” Hayward said.

Some financial institutions and agencies have become active in acquiring large numbers of single-family homes.

“Single-family rentals could have legs,” Brickman said.

Hayward said Fannie Mae “put a toe in the water,” with a limited commitment, while Premer said single-family rentals didn’t fit with Pacific Life’s business plan.

In conclusion, panelists said overbuilding apartments isn’t a problem in San Diego, or in most other parts of the country.

“We haven’t seen the overbuilding in multifamily that sometimes has manifested itself in other areas,” Hayward said.

Premer agreed. “Apartments are the most liquid of assets,” he added. “You might not get the same yield as other classes, but for safety and strength, they are tough to beat.”

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