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What Am I Missing Here: Multifamily Loans Down 63%?

August 22, 2008

From National Real Estate Investor comes news that loans for commercial multifamily projects have dropped 63% year over year:

Commercial and multifamily mortgage loan originations continued to fall on a year-over-year basis in the second quarter, according to the Mortgage Bankers Association’s (MBA) Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations. Second quarter originations were 63% lower than during the same period last year. Conduits for commercial mortgage-backed securities (CMBS) registered a 98% drop compared with the same period last year.

“The slowdown in originations has come from both a decrease in the supply of capital available and a decrease in the demand for new mortgages,” says Jamie Woodwell, MBA’s vice president of commercial/multifamily real estate research. “It is likely volumes will remain muted until buyers, sellers, borrowers, lenders and their expectations of rates and terms match closely enough for transaction activity to pick back up.”

I don’t quite get this.  There has to be more to this story.

We’re in the midst of a severe downturn in the housing market.  The people who are in a position to know are saying they don’t know when things will turn around, as transaction sides and home values are both down in the pits.

This should be absolute boom times for multifamily, no?

I mean, people may no longer be able to get a mortgage to buy a house.  People might be losing their homes to foreclosure.  But they have to live somewhere, don’t they?  I suppose it’s possible that all those unsold homes are now being rented out, but that doesn’t make a lot of sense.  Someone who wants to sell a house doesn’t necessarily want to take on tenants who may stick around for a year at least.

I would think that demand for rental multifamily would be enormous.  So what gives?

/scratch head in puzzlement.


5 Comments leave one →
  1. Scott permalink
    August 22, 2008 10:51 pm

    Could the subprime fiasco be the major cause of this? Banks don’t have cash to loan to anyone therefore loans are down across the board? Are loans for retail properties down as well? If so by how much? My guess is that they are down a lot more than multifamily loans

  2. August 23, 2008 8:20 am

    @Scott –

    Could be that the banks are all getting hammered and the other shoe is yet to drop.

    But that doesn’t explain the decrease in demand for new loans. Are developers and investors just thinking that there’s no point in seeking mortgages because they know the banks won’t lend at any price?


  3. August 23, 2008 2:40 pm

    I don’t think that there’s a “silver bullet” answer, but there are certainly a lot of factors to consider. As a premise, I’m going to go out on a (short) limb and suggest that most of the multifamily properties are in greater urban areas, which are also the areas hardest-hit by devaluation.

    First, a lot of budding property managers are likely finding themselves underwater or, at least, “equity neutralized” by the downturn — just as single-family homeowners are. They’re no longer in a position to invest in additional properties, regardless of whether there may be profit to be had.

    Second, even the veteran investors watching their equity portfolio shrink are going to have some trepidation about expanding their empire in this climate. Property taxes are also on their way up as municipalities try to cover their flagging income, which eats away at the bottom line as price competition eats away at the top line. Even stocks have a more promising outlook. I know one such magnate who has cut his rental property holdings in half in the past 18 months.

    Third, those daring property investors who are comfortable with the environment and seeing areas of recovery are snapping up foreclosures, auctions, and short-sales at 25%-50% of the property’s assessed value (often in the mid-five-figure range). They use cash and don’t register on mortgage barometers.

    Needless to say, I’m personally not surprised.


  4. August 23, 2008 5:30 pm

    @Matt –

    Your logic makes sense. If most landlords are upside down on their properties, then they’re likely not to have the financial strength to get further mortgages.

    But if you are a professional MF organization with thousands of units, I have to think you’re probably rubbing your mittens together with the current housing downturn. Increase in taxes can’t be that big a problem — they can just pass that on to the tenant. Again, the key thing here is that people have to live somewhere. Even those folks going into foreclosure are still employed; they have income; they just bought at the height of an inflated market or bought too much house for their income using some janky subprime IO mortgage. But they all have to live somewhere.

    What does make sense, however, is that even rental properties are impacted by the lack of capital. Since most models build in a disposition at some point to justify the return, landlords may be looking at very unattractive returns until the market turns around. Maybe they’re all just moving cash from investing in MF into gold or something.

    The foreclosures and auctions and short-sales shouldn’t impact this category too much — I mean we’re talking about 150-unit apartment complexes, not single family houses or condo units.

    I’m going to have to look into rent and vacancy rate trends over the past six months….


  5. August 23, 2008 6:25 pm

    Granted, there’s probably a higher level of considerations for the 150+ unit crowd, but given the number of developer bankruptcies in the inflated areas, those properties aren’t likely selling (or renting) for anywhere near their original projections (if not costs).

    Corcoran and Otis & Ahearn agree that the top end has recovered, but that goes back to the “there never was a mortgage” group:

    It’ll probably be another year before the glut of excessive expectations from two years ago sells through the market at reduced returns (or wider losses) and inventory pares down. At that point, I’d expect to see multi-units recover in the unsaturated markets.


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