Top Takeaways From The CREF/Multifamily Housing Convention & Expo 2019
By Alan Clifton, Ogal Claspell
March 18, 2019
Alan Clifton is Chief Investment Officer and Ogal Claspell is Senior Vice President of Realty Investments with Passco Cos., Irvine, Calif., which acquires, develops and manages multifamily and commercial properties throughout the U.S. totaling $4.8 billion in property since its inception. Learn more at passco.com.
More than 3,000 real estate finance professionals gathered at the Mortgage Bankers Association's CREF/Multifamily Housing Convention and Expo to network, deepen relationships and assess the state of the industry. Conversations included the overall health of the real estate industry and whether a downturn is on the horizon, how debt funds and commercial mortgage-backed securities are aggressively pursuing transactions, the potential impacts of Opportunity Zones on investment and financing and methods to tackle multifamily affordability issues.
Our top five takeaways from the event:
1) The Overall Outlook Remains Optimistic But Realistic
The general consensus of industry leaders at CREF was that 2019 is ramping up to be a strong year for commercial real estate finance activity, similar to last year. While CRE professionals are concerned about a potential upcoming downturn within the next few years, it is widely believed that a factor not directly related to real estate such as a significant political event or disaster could set this in motion.
There is no hard data to back up exactly when and why a downturn will occur, and it is not expected to be nearly as dire as the recession of a decade ago. Still, investors and lenders alike are approaching transactions realistically and with increased scrutiny, performing strict due diligence to ensure investments are sound.
Ultimately, there is ample capital available that is hungry for real estate deals--although due to this cautious optimism, the question on the minds of many real estate finance professionals is if there will be enough transaction activity to move it all.
2) Record Levels of Debt Fund Activity
A major topic of discussion over the course of the event was amount of debt funds aggressively competing in commercial real estate finance.
The approximately 140 debt funds in existence originated an unprecedented $67 billion in mortgages in 2018--more than double the volume originated just two years prior. These funds are also experiencing an influx of institutional and foreign capital.
Since they are not under strict regulation like banks, debt funds are able to offer much higher leverage and are an increasingly attractive alternative option, especially for short-term bridge loans.
Further, debt funds have not only proven themselves to be a strong competitor of banks, but also an ally. Banks can limit risk and increase their own returns through partnering with debt funds to fulfill a portion of borrowers' requirements.
3) The CMBS Market is Ramping Back Up and Will be More Aggressive
After a strong rebound in 2017, CMBS originations have been trending down over the past year and are anticipated to decrease further in 2019. But CMBS lenders remain hungry for deals.
To combat this decline in activity, CMBS lenders are increasingly offering full-term interest only structure, which could create some risk, and higher loan-to-value ratios.
4) Opportunity Zones Could Potentially Affect Pricing
At CREF, industry experts considered the possibility that Opportunity Zone legislation could create artificial asset bubbles; that investors chasing tax breaks without understanding the realistic value of the properties they are acquiring could lead to overpayment and ill-advised underwriting.
For example, an investor might identify a retail asset in a designated Opportunity Zone location that presents an opportunity for value-add rehabilitation, then after completing renovations, realize the fundamentals of the submarket make it difficult to attract the high-quality tenancy that was anticipated.
While still speculation at this point, it is important those pursuing Opportunity Zone fund investments keep this possibility in mind when evaluating the value of these acquisitions moving forward.
5) GSEs Are Highly Active--And Attempting to Solve the Affordability Crisis
GSE loan volume hit a record-high last year. The bulk of Fannie Mae and Freddie Mac transactions in 2018 were in the uncapped Green, Seniors Housing, Affordable Housing financing spaces. At CREF, agency leaders expressed the importance of addressing the affordability crisis in multifamily and encouraging investment in the affordable housing sector.
For example, Freddie Mac recently introduced a program intended to bolster affordable housing development by removing some of the interest rate risk to developers when projects move from the construction financing stage to permanent financing.
That said, the bottom line challenge to overcome is that affordable housing cannot be built affordably in many cases amidst skyrocketing lands, materials, and construction costs, as well as entitlement and zoning issues so this is likely to continue to be a persistent and prominent issue facing the industry as development costs rise overall.
On the heels of CREF 2019, record levels of activity and strong competition for financing transactions indicate a highly positive outlook for commercial real estate/multifamily financing and investment.
While transactions will continue be approached with increasing caution as the cycle lengthens, several significant players in the lending space and new incentives for investment, including those presented in Opportunity Zone legislation and through multifamily GSE programs, are likely to sustain a healthy and diverse market in the years to come.
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