Multifamily borrowers: To refinance or not to refinance?

While commercial real estate owners and their lenders look to have a tough year ahead of them, the multifamily industry has a little more room for comfort, thanks primarily to the availability of financing from the agencies and HUD. The CMBS market is shutdown and multifamily transactions have slowed. Many properties are underwater because some mix of declining operations, tightening loan parameters or rising cap rates. Add to this the sheer volume of commercial mortgage maturities over the next four years and the scarcity of equity, and you can see a widening gap between the CRE industry's need for capital and market's ability to supply it. So far this year there has only been $888 million CMBS issued in comparison to $12 billion in 2008 and $230 billion in 2007. The dollar volume of maturities rises from around $200 billion in 2009 to $340 billion in 2012. Thankfully for multifamily owners, Fannie Mae, Freddie Mac and HUD are still in the market; without the permanent debt they provide, owners would be under tremendous pressure, putting at risk the largest stock of affordable housing in the country. Today, many multifamily borrowers are either a) not sure if they can refinance now without coming out of pocket but have a year or more until a mortgage matures, or b) have loans maturing in two and three years that might be underwater if they wait. In February, Freddie Mac tightened loan parameters and Fannie Mae followed suit in April. Although dramatically tighter than a year ago, their terms are significantly better than what is available elsewhere. With all this in mind, Walker & Dunlop has closed over $1 billion in agency money this year at rates predominantly between 5% and 6%, including the Ritz Plaza Apartments refinance of $151 million in July at a rate of 5.34%. Any borrower who has a year or less until the maturity of a mortgage and will have to come out of pocket to refinance should focus now on where their equity will come from - the balance will not come from additional loan proceeds. For those with later maturities, start working with your lender sooner rather than later so that you have a clear idea of what to expect and put some or all of those maturities to bed now. We see many borrowers lose a lot more in proceeds than what they would have paid in prepayment penalties "waiting for things to get better." It's also very much in everyone's interest to do a little lobbying on the agencies' behalf; since they were put into conservatorship, they cannot lobby for themselves. Their delinquency rates remain below 0.35% (end of 1st quarter 2009) while multifamily CMBS increased to 5.35% at the end of Q2 2009 from 3.70% at the end of Q1, 2009. If you want Fannie and Freddie to remain strong and continue lending, you should let your congressmen and senators know how much they mean to you. All things considered, multifamily owners should feel blessed in comparison to other CRE owners. But the financing markets are changing daily with multifamily fundamentals on the decline across the nation. Making sure you have a clear path to refinancing any owned assets and lining up any acquisition financing well ahead of going hard is mandatory in today's market. Andrew Stone is an assistant vice president, multifamily finance at Walker & Dunlop, New Orleans, La.