Tom Toland, Walker & DunlopPart one previously appeared in the October Financial Digest of the New York Real Estate Journal.
Another interesting impact of NYC’s CRE boom is that the tremendous competition for deals has driven many NYC-based real estate owners into secondary and tertiary markets around the country searching for better returns than what they can find locally. For example, an apartment sale in Nashville may now have more buyers based out of New York than in Tennessee. Certain fundamentally strong growth markets historically dominated by local operators – such as Pittsburgh, PA or Birmingham, AL – have attracted the attention of NYC owners and investors who no longer want to overpay for deals in NYC or elsewhere.
Riding the “Re-Fi Wave”
The greatly anticipated “maturity wave” of CMBS deals originated in during the 2006-2007 bubble is finally here and with it comes both challenges and opportunities.
The apartment sector remains in relatively good shape with solid fundamentals and a ton of competitive financing options nationally, even in smaller markets. Bolstered by Fannie Mae and Freddie Mac which control about 40% of the multifamily finance market, the competition for deals between apartment lenders remains active in many areas.
However, the multifamily debt market contrasts sharply with the capital options available to office and retail owners, particularly in secondary and tertiary markets. Stricter underwriting, increasing vacancies, decreasing valuations, and a significantly smaller pool of realistic debt options have created numerous challenges for owners hoping to refinance their maturing high leverage CMBS loans. In many scenarios, the only available refinance options require an owner to inject a significant amount of additional equity to keep the property. This is creating a number of new opportunities for opportunistic buyers looking for distressed situations and also encouraged the emergence of mezzanine lenders and preferred equity funds looking to bridge the equity gap on these CMBS re-fi deals.
Affordable Housing and Green Projects Lead the Way
Fannie Mae and Freddie Mac continue to provide the core foundation for the multifamily debt market where they account for approximately 40% of the overall lending on apartment deals and are projected to deploy over $100 billion in new loans by the end of 2016. While the agencies are active in the finance of conventional market-rate apartment projects, they continue to focus on their core mission of affordable housing through pricing and structural incentives to owners of affordable properties.
Additionally, both Freddie and Fannie rolled out significant updates and improvements to their “green” financing programs in 2016 using significant pricing breaks to incentivize owners to improve the energy and water efficiency at their properties.
The Future is Bright - Rental Demand, Growth to Continue to Increase
Driven by several factors – low inventory and the lack of new construction, increasing population, the challenges of purchasing and financing a home - the demand for rental housing in New York will remain strong for the foreseeable future.
Thomas Toland is senior vice president of Walker & Dunlop, New York, N.Y.
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