Apartments: The next credit-crisis shoe to drop?
You might think apartment owners are doing fine -- or at least better than homeowners -- as waves of foreclosures push more people into rentals. But even the apartment industry can't escape the foreclosure-fueled credit crisis. That's because lenders stopped lending across the board.
So says Harvard's Joint Center for Housing Studies in a report you can read at the National Multi Housing Council site. (The council, a trade group, provided some of the support for the report.)
Harvard's center notes a danger that apartment owners could follow homeowners into default if the lending situation doesn't improve, even though their loan performance "remains quite strong." Multifamily loans generally come due quickly -- in five to 10 years rather than 30 -- and industry players count on being able to refinance.
From the report:
That puts an even greater sense of urgency on preparing plans now to make sure federal sources continue to provide liquidity.
The risks are great. The CMBS [commercial mortgage-backed security] market has basically shut down, banks and thrifts are presently not willing to lend for multifamily new construction or rehabilitation, and life insurance companies, pension funds, endowments, and others that have provided permanent financing are standing on the sidelines. Also, with no income tax liability to shelter, Fannie Mae and Freddie Mac have stopped buying low-income housing tax credits.
New investors have not yet been found to fill the gap and credit pricing is making most planned projects unworkable. Meanwhile, the public markets for state tax-exempt bonds have been roiled, making it harder to finance the preservation and production of much needed affordable, low-income housing.
Comments
Lending is sluggish compared to prior years, but the one sector that has not felt that pain (yet) is Multifamily. The GNMA project loan market is the only market that has issued CMBS deals since June of this year, and issuance was actually up year-over-year compared to 2007. Looking over the several billion in loans that were made in December, they were overwhelmingly Multifamily loans.
I have not read the study you reference, but assuming it is quoted correctly it is drawing a poor conclusion. The CMBS market contains senior mortgages on stabilized (mostly) properties - not construction or rehab loans at all! Further, the vast majority of commercial mortgages have 10-year balloons with 30-year amortization, with variations of that. Transitional loans (construction and rehab) are typically short-term floaters and are not in 90%+ CMBS deals, with a few exceptions in very specific and small sub-sectors.
A 10-year performing loan doesn't have a problem refinancing right now. Let's say it was originated in 1999 with an 8% coupon, and a relatively low LTV between 60 - 70%. It has 10-years of appreciation built into it, and even 30% price declines do not hurt it, current rates are still lower, and if it's performing as well as claimed, then I'd be hard pressed to believe it is having trouble refinancing right now.
Posted by: Dark Space | January 28, 2009 10:59 PM
That's interesting information, Dark Space -- thanks for sharing it. I think I quoted the report accurately (I wouldn't have knowingly quoted it inaccurately), but I'd be interested to hear what you think if you read it.
Posted by: Jamie Smith Hopkins | January 29, 2009 7:44 AM
Ah, I see you have read the report now. Informative post on your blog.
Posted by: Jamie Smith Hopkins | January 29, 2009 7:55 AM
An interesting story, but unfortunately not the complete story.
Being in the industry I find myself wanting to climb the tallest building and shout to the commercial real estate world, "LOOK BACK IN HISTORY, AND STOP FOCUSING ON WHAT USED TO BE!".
Because what used to be is not working for you, and history may hold some clues for finding relief.
The history I am referring to is the Savings & Loan Crisis of the 1980's.
Do you remember what happened in the residential financing community back then?
Well, you may recall that prior to the S&L Crisis the majority of home loan transactions took place at your local Bank.
However, during the S&L Crisis local banks stopped funding residential loans. So what did people do?
They discovered Residential Mortgage Brokers, who quickly seized the opportunity to enter the market, and have since dominated the market.
Fast forward to today, and our current economic mess. Local and Regional Banks are sitting on their money, most flat out turning borrowers away. Some, saying they will do the loan, and even going so far as approving the loan, but failing to fund it.
And of course as you mentioned above, the CMBS market has come to a grinding halt.
So how do you explain then that in the next 30 days my company will be responsible for the funding of almost $1 Billion in commercial loans? More specifically, almost $1 Billion in just Acquisition and Development Financing!
Surprised?
You shouldn't be. The fact of the matter is, there is money to be found in the Commercial Market.
Plenty of it in fact! As a Branch President for the largest Commercial Mortgage Broker in the Country, I urge you to get the word out to those who are in need, that there is Commercial money available.
We are in the midst of a change in the Commercial market that will ultimately have a profound impact on Commercial Lending from this point forward.
Having a voice much louder than mine, even if I'm shouting from the tallest building, I urge you to let everyone know that "change" is upon us, in many ways!
Change is not a word reserved just for politicians. If we fail to embrace change, the recovery will take much longer than necessary.
Thanks for listening!
Jay Estis
Posted by: Jay Estis | January 29, 2009 9:05 AM
Thanks. I went back and read the report in more detail. I think the overall gist was good, but some of the proposals I disagree with, and a lot of the information was incorrect (or at least seemed incorrect based on the limited amount of knowledge I have at hand).
Posted by: Dark Space | January 29, 2009 9:17 AM