Tag Archives: multifamily

Feds Financing Multifamily

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Brett VA

The Congressional Budget Office has released The Federal Role in the Financing of Multifamily Rental Properties. The report opens,

Multifamily properties—those with five or more units— provide shelter for approximately one-third of the more than 100 million renters in the United States and account for about 14 percent of all housing units. Mortgages carrying an actual or implied federal guarantee have been an important source of financing for acquiring, developing, and rehabilitating multifamily properties, particularly after the collapse in house prices and credit availability that accompanied the 2008–2009 recession. According to the Federal Reserve, the share of outstanding multifamily mortgages carrying such a guarantee increased by 10 percentage points, from 33 percent at the beginning of 2005 to 43 percent at the end of the third quarter of 2014. (A slightly larger increase of about 16 percentage points occurred in the federal government’s market share of the much larger single-family market.) Such guarantees are made by a variety of entities, and some policymakers are looking for ways to make the federal government’s involvement more effective. Other policymakers have expressed concern about that expanded federal role and are looking at ways to reduce it. (1)

This debate is, of course, key to housing policy more generally: to what extent should the government be involved in the provision of credit in that sector?

This report does a nice job of summarizing the state of the multifamily housing sector, particularly since the financial crisis. It provides an overview of federal mortgage guarantees for multifamily projects and reviews the choices that Congress faces when it decides to determine Fannie and Freddie’s fate. That is, should we have a federal agency guarantee multifamily mortgages; take a hybrid public/private approach; authorize a federal guarantor of last resort; or take a largely private approach?

We should start by asking if there is a market failure in the housing finance sector and then ask how the government should intercede to correct that market failure. My own sense is that we intercede too much and we should move toward a federal guarantor of last resort with additional support for the low- and moderate-income subsector of the market.

 

 

 

Preserving Workforce Housing

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"Affordable housing" by BrightFarm Systems

The Urban Land Institute has issued Preserving Multifamily Workforce and Affordable Housing: New Approaches for Investing in a Vital National Asset. Stockton Williams, the Executive Director of the ULI Terwilliger Center for Housing, opens the report with a Letter from the Author,

Real estate investors seeking competitive returns increasingly view lower- and middle-income apartments as an attractive target for repositioning to serve higher-income households. In response, creative approaches are emerging for preserving the affordability of this critical asset class for its current residents and those of similar means—while still delivering financial returns to investors.

This report from the ULI Terwilliger Center for Housing provides a broad-based overview of this rapidly evolving landscape. It profiles 16 leading efforts to preserve multifamily workforce and affordable housing, including below-market debt funds, private equity vehicles, and real estate investment trusts.

Collectively, the entities leading these efforts have raised or plan to raise more than $3 billion and have acquired, rehabilitated, and developed nearly 60,000 housing units for lower- and middle-income renters, with thousands of additional units in the pipeline. Several are actively raising more capital to expand their activities. They are meeting a pressing social need while delivering cash-on-cash returns to equity investors ranging from 6 to 12 percent.

The report is written with the following primary audiences in mind:

■ Developers and owners looking for new sources of capital to acquire, rehabilitate, and develop multifamily workforce and affordable properties;

■ Local officials and community leaders seeking options for attracting or creating new sources of financing to meet their rising rental housing needs for lower- and middle-income families; and

■ Real estate investors and lenders interested in more fully understanding their range of options for a product type that offers financial as well as social returns.

As the country continues to grapple with the worst housing crisis for lower- and middle-income renters it has ever known, the private sector and community-based institutions must play an ever-greater role in ensuring that existing affordable properties remain available to the many who need them, while doing what they can to produce new units where possible. The financing vehicles profiled here show what is possible and suggest opportunities for further progress. (iv)

I found Part II particularly useful, with its overview of financing vehicles. Many readers of this blog will benefit from a description of below-market debt funds, private equity vehicles and real estate investment trusts, particularly as they are illustrated with real world examples like the Bay Area Transit-Oriented Affordable Housing Fund, Avanath Capital Management and the Community Development Trust.

Buy-To-Rent Investing

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"Foreclosedhome" by User:Brendel

James Mills, Raven Molloy and Rebecca Zarutskie have posted Large-Scale Buy-to-Rent Investors in the Single-Family Housing Market: The Emergence of a New Asset Class? to SSRN. The abstract reads,

In 2012, several large firms began purchasing single-family homes with the stated intention of creating large portfolios of rental property. We present the first systematic evidence on how this new investor activity differs from that of other investors in the housing market. Many aspects of buy-to-rent investor behavior are consistent with holding property for rent rather than reselling quickly. Additionally, the large size of these investors imparts a few important advantages. In the short run, this investment activity appears to have supported house prices in the areas where it is concentrated. The longer-run impacts remain to be seen.

I had been very skeptical of this asset class when it first appeared, thinking that the housing crisis presented a one-time opportunity for investors to profit from this type of investment. The conventional wisdom had been that it was too hard to manage so many units scattered over so much territory. The authors identify reasons to think that that conventional wisdom is now outdated:

To the extent that technological improvements, economies of scale, and lower financing costs have substantially reduced the operating costs of buy-to-rent investors relative to smaller investors, large portfolios of single-family rental property may become a permanent feature of the real estate market. As such, the events of the past three years may signal the emergence of a new class of real estate asset. A similar transformation occurred in the market for multifamily structures in the 1990s, when large firms began to purchase multifamily property and created portfolios of professionally-managed multifamily units that were traded on public stock exchanges as REITs. (32-33)

Nonetheless, the authors are cautious (rightfully so, as far as I am concerned) in their predictions: “only time will tell whether the recent purchases of large-scale buy-to-rent investors reflect the emergence of a new asset class or whether the business model will fail to be viable over the longer-term.” (33, footnote omitted)

Rapid Growth for Property Managers

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hot air balloons

Buildium.com quoted me in Can Rapid Growth Endanger Your Business? It reads, in part,

For property managers, the prospect of rapid growth can be thrilling. You lease the units in your first building, fill vacancies quickly, add services that let you charge higher rent, the building owner compliments your work, and before you know it, you’re thinking: “Why not more?” After all, why waste a great opportunity to make more money by simply repeating what you’ve done so well at your first property? All the stars seem aligned…

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7 Steps to Find Out If You’re Ready to Expand Your Property Management Portfolio

Here are seven steps to take before fast-tracking you company’s expansion:

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#6: Know the local rules & the laws

If the buildings you manage are different entities — one rent-controlled and the other a cooperative in an historic neighborhood, for example — you must understand their different requirements. The same can hold true for buildings in different communities where regulations covering trash pick-up and snow removal may vary.

And differences can be even greater for buildings in different states. In New York City, multifamily buildings with more than four units [may be] rent-regulated and involve a complex set of regulations between landlord and tenant, says attorney David Reiss, a professor of law and the Research Director at Brooklyn Law School’s Center for Urban Business Entrepreneurship. “If you don’t know what they are, it can be a recipe for disaster,” he says.

Also important to know, he says, is that some buildings are located in historic districts, which the Landmarks Preservation Commission can authorize, and that affects how owners and managers can renovate, rehab, and maintain exteriors, Reiss says. “You might have to place an air conditioning unit a certain way.”

#7: Consult with other property managers

Besides doing your homework, talk to owners and managers of similar properties who’ve expanded beyond a single listing. Reiss says many communities have property management organizations that share information, or your city or town may have an association of like-minded businesses. If not, maybe, you can become a local hero by starting one.

 

From Owners to Renters

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Frank Nothaft

Frank Nothaft

CoreLogic’s July issue of The MarketPulse has in interesting piece by Frank Nothaft, Rental Remains Robust (registration required). It opens,

A vibrant rental market has been an outgrowth of the Great Recession and housing market crash. Apartment vacancy rates are down to their lowest levels since the 1980s, rental apartment construction is the most robust in more than 25 years, rents are up, and apartment building values are at or above their prior peaks. But the rental market is more than just apartments in high-rise buildings.

Apartments in buildings with five or more residences account for 42 percent of the U.S. rental stock. Additionally, two-to-four-family housing units comprise an additional 18 percent of the rental stock, and one-family homes make up the remaining 40 percent.

The foreclosure crisis resulted in a large number of homes being acquired by investors and turned into rentals.  Between 2006 and 2013, three million single-family detached houses were added to the nation’s rental stock, an increase of 32 percent. The increase in the single-family rental stock has been geographically broad based, but has impacted some markets more than others.

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While the growth in the rental stock has been large, so has been the demand. Some of the households seeking rental houses were displaced through foreclosure. Others were millennials who had begun or were planning families, but were unable or unwilling to buy. (1-2, footnotes omitted)

Nothaft’s focus is on the investment outlook for rental housing, but I find that his summary has a lot to offer the housing policy world as well. He describes a large change in the balance between the rental and homeowner housing stock, one that has had an outsized effect on certain communities and certain generations.

Housing policy commentators generally feel that the federal government provides way too much support to homeowners (mostly through the tax code) and not enough to renters. Perhaps this demographic shift will spur politicians to rethink that balance. Renters should not be treated like second class citizens.

Fannie & Freddie and Multifamily

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The Urban Institute has posted a Housing Finance Policy Center Brief, The GSEs’ Shrinking Role in the Multifamily Market. It opens,

Though the two government-sponsored enterprises (GSEs)—Fannie Mae and Freddie Mac—are best known for their dominant role in the single-family mortgage market, they have also been major providers of multifamily housing financing for more than 25 years. Their role in the multifamily market, however, has declined substantially since the housing crisis and has reverted to more normalized levels. In addition, even as the GSEs continue to meet or exceed their multifamily affordable housing goals, their financing for certain underserved segments of the market has fallen steeply in recent years.

Given recent declines, policymakers and regulators should consider maintaining or increasing the GSEs’ footprint in the multifamily market, especially in underserved segments. The scorecard cap increases and exemptions recently employed by the Federal Housing Finance Agency (FHFA) to slow the decline in GSE multifamily volume have been somewhat effective, but they may not be enough to prevent the GSEs’ role from shrinking further. (1)

The policy brief’s main takeaway is that “policymakers and regulators should consider maintaining or increasing GSEs’ role in the multifamily market.” (8) I was struck by the fact that this policy brief pretty much took for granted that it is good for the GSEs to have such a big (and increasing) role in the multifamily market:

Though the multifamily market continues to remain strong and private financing is readily available today, it is also poised to grow significantly because of rising property prices and higher future demand. This raises the question of whether the GSEs should continue to shrink their multifamily footprint even further below the level of early 2000s, a period of relatively stable housing market. (8)

Government intervention in markets is usually called for when there is a market failure. The policy brief indicates the opposite — “private financing is readily available today.” The brief does argue that financing “backed by pure private capital is likely to be concentrated within the more profitable mid-to-high end of the market.” (9) That does not indicate that there is a market failure, just that borrowing costs should be cheaper for such projects. If the federal government is going to effectively subsidize a functioning credit market through the GSEs, it should make sure that it is getting something concrete in return, like affordable housing. Just supporting a credit market generally because it tends to support affordable housing is an inefficient way to achieve public goods like affordable housing. It also is a recipe for special interest capture and a future housing finance crisis. To the extent that this private credit market can function on its own, the government should limit its role to safety and soundness regulation and affordable housing creation.

Frannie Conservatorships: What A Long, Strange Trip It’s Been

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The Federal Housing Finance Agency Office of Inspector General has posted a White Paper, FHFA’s Conservatorships of Fannie Mae and Freddie Mac: A Long and Complicated Journey. This White Paper on conservatorships updates a first one that OIG published in 2012. This one notes that over the past six years,

FHFA has administered two conservatorships of unprecedented scope and simultaneously served as the regulator for these large, complex companies that dominate the secondary mortgage market and the mortgage securitization sector of the U.S. housing finance industry. Congress granted FHFA sweeping conservatorship authority over the Enterprises. For example, as conservator, FHFA can exercise decision-making authority over the Enterprises’ multi-trillion dollar books of business; it can direct the Enterprises to increase the fees they charge to guarantee mortgage-backed securities; it can mandate changes to the Enterprises’ credit underwriting and servicing standards for single-family and multifamily mortgage products; and it can set policy governing the disposition of the Enterprises’ inventory of approximately 121,000 real estate owned properties. (2)

I was particularly interested by the foreward looking statements contained in this White Paper:

Director Watt has repeatedly asserted that conservatorship “cannot and should not be a permanent state” for the Enterprises. Director Watt has indicated that under his stewardship FHFA will continue the conservatorships and build a bridge to a new housing finance system, whenever that system is put into place by Congress. In this phase of the conservatorships, FHFA seeks to place more decision-making in the hands of the Enterprises. (3)

Those who have been hoping that the FHFA will act decisively in the face of Congressional inaction should let that dream go. And given that just about nobody believes (I still hope though) that there will be Congressional reform of Fannie and Freddie during the remainder of the Obama Administration, we must face the reality that we are stuck with the conservatorships and all of the risks that they foster for the foreseeable future. Today’s risks include historically high rates of mortgage delinquencies and exposure to defaults by counterparties like private mortgage insurers. As I have said before, the risks that Fannie and Freddie are nothing to laugh at. Let’s hope that the FHFA is up to managing them until Congress finally acts.