Growth, competition and affordability

Donald P. King III of Walker & Dunlop explores the state of the multifamily financing market in the US.

Across the US, the financing market for multifamily properties continues to be hot, maintaining the level of dynamism and growth it has sustained throughout 2016.

Donald P. King III
Donald P. King III

Along with this, unsurprisingly, competition for deals continues to be steep. Fannie Mae and Freddie Mac are on track to reach a 10-year record of more than $50 billion each in deals closed this year alone. With banks continuing to pull back on construction lending, alternative financing entities, such as life companies, have seen an increase in activity.

Additionally, with the Federal Housing Finance Agency (FHFA) increasing Fannie Mae and Freddie Mac’s cap this past August, it became unmistakably clear that the multifamily market was in fact larger than was originally thought earlier in the year. This has introduced a new focus and growth potential into many of the country’s key markets.

Explosive multifamily growth in top markets, quest for affordability continues

Rental rates and occupancies in multifamily properties across the country are generally healthy and robust. However, in some key cities and surrounding areas such as Denver, Colorado; Dallas, Texas; Boston, Massachusetts; and Los Angeles, California, large numbers of high-end units have recently been, or are about to be, delivered and it is unclear if the high-end market demand is deep enough to absorb these units in line with original projections.

The production of new multifamily units does not align well with the broader demand for rental housing. In Dallas, for example, where much of the new high-end construction is located, the property vacancy rate is 11.7 percent, while in the suburbs the vacancy rate is 4.4 percent.

The majority of the permits for the luxury property deals in these key areas were approved more than a year ago. However, as awareness and the impact of the ‘affordability gap’ has continued to widen, construction loan approvals are slowing down in an attempt to not increase the chasm between supply and demand.

Higher vacancy rates in the newly constructed high-end units are a reflection of the ever-increasing rental rates, which continue to outpace the market’s ability to meet them, and underscore the need for additional action to be taken in promoting and supporting future affordable housing project activity.

The ‘affordability gap’ that is being seen in many of the country’s top markets as a result is continuing to be a factor affecting not just the housing markets, but the local economies in those areas as well. Many units are being produced but the rates that builders and investors must charge in order to justify a profit are keeping rental rates higher than many in search of affordable or workforce housing can afford.

There is, and continues to be, a significant opportunity for changes to come in at the federal level to bridge this gap in the form of expanded tax credits, builder subsidies, and other similar regulatory changes in order to make affordable housing projects more of a priority for the national multifamily market going forward.

Growth and evolution of financing: Fannie Mae and Freddie Mac continue to lead the push toward affordable and smaller loan products

The FHFA’s most recent goals for Fannie Mae and Freddie Mac have continued to incentivise them to lean into greater amounts of affordable and smaller multifamily properties. Both GSE’s compete heavily for loans that are ‘goals rich’.

Properties with rents that are affordable to low income and very low income households, and smaller properties that contain between 5 and 50 units, are examples. Fannie and Freddie’s focus on these market segments is driving large amounts of production as well as bringing down the cost of financing for these asset types. They are also a key driver of growth across the multifamily space as a result.

Future outlook signals continued growth in the acquisition market, intense competition for deals, and strength across the national multifamily market space

Amidst all of the other changes the multifamily financing market has experienced over the past several months, certain key aspects continue to remain consistent – intense competition for deals, and incredibly strong acquisition market activity. Within this, the level of trading taking place at present is active and diverse, with several types of borrowers or owners continuing to enter the market.

While previously, long-term owners were more commonplace, the market is shifting toward more of a three- to seven-year time horizon due to newer investors entering the space, attracted by the availability of funds and strength in activity, which can lead to strong returns. This change to shorter hold periods in buying assets, versus investing for the ‘longer haul,’ has also continued to lead the charge to adjustable-rate debt with flexible pre-payment options.

Also, with competition to buy quality properties intensifying with no sign of slowing down, cap rates are continuing to be driven very low, in top-tier markets particularly. As a result of this, secondary and tertiary market spaces are becoming more and more attractive to investors in an effort to chase yield.

However, it is important to ensure that in these more outlying market spaces there is a strong depth to the local employment base to ensure strong returns and sustainable growth over the short and long terms.

All told, the state of the national multifamily financing market continues to be strong, dynamic, and multi-faceted. Several exciting changes are set to come as key issues like the ‘affordability gap’ are addressed, and the effects of the intense competition for deals bring about new and innovative changes in investor activity throughout the space.


Donald P. King III is the executive vice president and chief production officer, multifamily at Walker & Dunlop. He brings more than 20 years of industry experience in the space, and leads the strategic development, growth, and product development of the Fannie Mae and Freddie Mac platforms.

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