Multifamily Lending Starting to Level Off

Posted on November 10, 2015

Lenders will keep pouring money into apartment properties over the next two years, originating about the same volume of loans in 2016 and 2017—with slight increases—that they are likely to close in 2015, according to the latest Commercial/Multifamily Real Estate Finance Forecast from the Mortgage Bankers Association (MBA), an industry trade group.

“The forecast anticipates continued strength and growth,” says Jamie Woodwell, vice president for the research and economics group at MBA.

That’s still going to be a big change from the last few years, when business of lending on multifamily real estate didn’t just grow a little, but instead grew incredibly quickly. So far in 2015, lenders have increased the volume of apartment loans they made by well over 10 percent compared to the year before. In 2016, experts expect more moderate growth, with less frenetic competition to make deals.

Outsized growth

Lenders will likely originate a total of $224 billion in permanent loans to multifamily properties in 2015, according to MBA. That’s a 15 percent increase from the $195 billion they lent in 2014, which in turn marked a 13 percent increase from $173 billion in multifamily originations in 2013. That year marked an 18 percent increase in originations from 2012.

Lending volume can’t grow like that forever. The growth this year already caught most experts by surprise.

“The volume in 2015 is higher than most people anticipated,” says Woodwell.

The Federal Reserve was expected to raise its benchmark interest rates earlier this year. Instead, federal officials continue to postpone raising rates. Their next chance will be in December. In the meantime, low interest rates support high property values, encourage potential investors to buy more assets and existing property owners to refinance. All these factors increase demand for financing. And lenders continue to be eager to lend on apartment properties. Everyone in the business knows apartment loans have experienced relatively few problems with defaults. The share of permanent multifamily mortgages on bank balance sheets that are 30 to 90 days late in their payments is now at its lowest level since the data became available in 1993, according to MBA.

“Multifamily mortgages have been performing extremely well,” says Woodwell.

Fannie, Freddie and banks on top

The lenders growing the fastest in 2015 include banks and agency lenders, who make loans to apartment properties based on the programs set by Fannie Mae and Freddie Mac. They increased the amount of mortgage debt they have outstanding to commercial and apartment properties by $15 billion in the second quarter of 2015. Giant loans on large portfolios of apartment properties account for much of the growth. The federal officials who effectively govern Fannie Mae and Freddie Mac also made this growth possible. Halfway through the year, they tinkered with the limits on how much the agencies can lend, so that many loans to affordable and workforce housing properties don’t count towards the agencies’ caps on lending.

Banks and thrift lenders also increased the amount of mortgage debt they have outstanding on commercial and apartment properties by $15 billion in the second quarter of 2015.

Life insurance companies and conduit lenders fell behind in the race to lend on apartment properties, though they increased their lending on other types of real estate. Insurance companies increased the amount of mortgage debt they have outstanding by $1.3 billion in the second quarter of 2015. Conduit lenders decreased the amount of mortgage debt they have outstanding by $1.6 billion in the second quarter of 2015.

“On the multifamily side, they are not getting as much of those types of deals as they are the other types,” says Woodwell.

Steady lending going forward

Lenders will keep busy over the next two years, keeping their volume of apartment lending at about the same level they maintain today. Lenders are expected to originate $225 billion in permanent loans on apartment properties in 2016, roughly the same as in 2015. They are expected to originate $227 billion in 2017, a tiny increase.

Over the long term, the volume of loans lenders make should continue to gradually grow.

“There is natural growth in the system,” says Woodwell. “Over the long term, one does see property values increasing, while completions increase the inventory of apartments that need financing.”