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Multifamily capitalizes on weak housing markets.

Single-family market losses could translate into multifamily housing gains, particularly in southern California, Phoenix and Las Vegas.

Kevin Burkhalter, senior vice president with Irvine, California-based Johnson Capital's Los Angeles office, said debt and equity in supply-constrained markets, such as southern California, along with debt and equity, have experienced players in the capital spectrum looking at underlying fundamentals--and he said they like what they see.

"[Multifamily properties] are leaning into some continued fundamental improvement and stable to upward sloping values ... because of limited supply," Burkhalter said. "That is why cap rates have moved down on apartments. We have seen some lenders more aggressive on apartment lending because they know the fundamentals are so strong."

While home buying can "trickle up" for borrowers into larger houses during a boom cycle, the rental food chain "trickles down" during the opposite end of a cycle, Burkhalter said.

"Here we are in the down cycle, and people who lost their homes or downsized are renting homes," he said. "But, just like some of those people who rented a 'move-down house' because they had a bigger house, some of those people further down the food chain may have owned a modest home and could be renting a two- or three-bedroom apartment."

Even in second-tier markets hardest hit by housing, high-end multifamily product experienced cap-rate compression, said John Manning, managing director of the Pacific Northwest region of real estate investment banking at Chicago-based Jones Lang LaSalle (JLL).

"Part of that is [buyers or investors] chasing yield," Manning said. "Buyers or investors in one of those markets could buy at a 7 percent cap rate, whereas the same asset in southern California or in core parts of northern California might have a cap rate in the 4 percent range. They are buying on these low cap rates because they see rents going up."

As buyers look at markets hit hard by the recession, they can find comfort in a 10-year Treasury down to nearly 3 percent in June and agency borrowing rates on fixed-rate loans between 4.75 percent and 5 percent for 10 years.

Burkhalter said near-historically-low interest rates on fixed-rate financing for multifamily rentals have some lenders holding interest-rate floors on lower-leverage transactions and in middle-tier loan terms, including five-, seven-and 10-year terms.

"That is a pretty recent development in direct relationship to the bond market rally that we had in the past couple of weeks," Burkhalter said. "On the equity side, cap rates compressed on apartments, as well as high-quality retail and warehouse distribution properties in southern California."

"[Investors] are looking at multifamily and seeing tenants sign six-to 12-month leases so they say they can increase that when times get better. Clearly, times are not getting worse, even in Phoenix and Las Vegas," Manning said. "Their debt is fixed at 4.75 percent to 5 percent for 10 years. That is a pretty good combination if they can get a 7 percent cap rate in a market like that. That makes them a buyer."

Phoenix and Las Vegas are still "pre-review" markets for Fannie Mae loans because lenders are more selective and underwrite those loans more carefully. It means Fannie Mae underwriters take a closer look at greater market and sub-market vacancies and concessions, and possibly place a higher debt coverage ratio on the properties in underwriting, Burkhalter said.

"Freddie Mac has been a relatively good player in those markets [Phoenix and Las Vegas]," Burkhalter said. "I believe it is partially a reflection of Freddie Mac's delinquency being close to zero."

More than 70 percent of Freddie Mac's multifamily funding volume in the past 15 months came from its Capital Markets Execution (CME) program. On June 3, Freddie Mac announced that adjustable-rate mortgages (ARMs) are also eligible for securitization into its K Certificates, purchased from Freddie Mac's multifamily mortgage-backed securities (MBS) off loans originated by the CME program.

David Brickman, senior vice president of multifamily with Freddie Mac, said CME continues to expand liquidity in the multifamily capital marketplace "by creating a reliable, competitively priced source of financing through our deep pool of capital providers."

He added, "Since we began offering K Certificates backed by CME loans, we've opened up the capital markets to commercial mortgage-backed securities issuances through 13 offerings totaling more than $14 billion."

"Fannie Mae [delinquencies] are still very low at 0.7 percent, but still higher than Freddie," Burkhalter said. "I think that is one reason we are seeing a slight difference in the way those two agencies are approaching multifamily underwriting in markets like Las Vegas and Phoenix."

More competition and additional capital could be good news for multifamily lenders in Las Vegas and Phoenix. Manning said life insurance companies are also "getting competitive on the multifamily side. We are seeing life companies win large amounts of multifamily business now--more than I have seen in the past at any point in time," he said.

"The Phoenix multifamily market is rapidly improving," said David Hendrickson, managing director in Jones Lang LaSalle's Capital Markets Division. Hendrickson and Keith Largay and Chuck Hoag, senior vice presidents at JLL, secured a $27 million senior mortgage loan for LaSalle Investment Management, Chicago, to acquire The Shade at Desert Ridge, a 342-unit multifamily property in Phoenix, through an affiliate of Hartford Investment Management Co., Hartford, Connecticut.

LaSalle purchased the property in an all-cash transaction in September 2010, but the firm secured the non-recourse, fixed-rate loan. "[LaSalle] saw an opportunity to acquire a strong asset in a recovering market, and Hartford had the same mindset when it comes to financing," Hendrickson said. In dealing with a complicated ground-lease structure, Hendrickson said, the terms and pre-payment options were "flexible" when the property closed at a 96 percent occupancy rate.
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Title Annotation:Commercial
Author:Murray, Michael
Publication:Mortgage Banking
Geographic Code:1U9CA
Date:Jul 1, 2011
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