Feature: Survey Says Capital Flowing to Multifamily Markets

By Keith Loria, Contributing Editor: The U.S. Treasury's annual survey reveals key insights on underwriting practices and how they affect multifamily.

The Office of the Comptroller of the Currency released its annual survey about credit underwriting practices and revealed that more than half of the national banks polled tightened standards for commercial products from 2008 to 2010, but since 2011, a rising percentage of surveyed banks have loosened their standards, while fewer banks have tightened underwriting.

In its Semiannual Risk Perspective for Spring 2015, the OCC attributed increased risk tolerance to the strengthening competitive atmosphere, persistent low interest rates, and pressure to deploy capital. The report concluded that “bankers continue to express concerns about the effects that intensified competition with other regulated financial institutions and nonbank financial firms are having on underwriting standards.”

The survey forecasted that as more capital flows into U.S. commercial real estate and lending competition grows, many industry experts are pointing out loosening underwriting practices. Furthermore, it said that while underwriting tightened during the Great Recession, market indicators suggest that the rebound of the economy has prompted lenders to take on more risk.

Chart fro the Semiannual Risk Perspective, Spring 2015, shows multifamily lending is continuing to grow.

Chart from the Semiannual Risk Perspective, Spring 2015, shows multifamily lending is continuing to grow.

After speculation that the quota would be reached by the end of the third quarter, Fannie Mae and Freddie Mac responded by tightening underwriting standards and hiking interest rates to reduce the flow of lending. Despite the exemptions and continued new agency issuance, CMBS lending has showed no signs of slowing, with total 2015 multifamily volume steadily approaching last year’s levels.

Trepp Research has released its own report, looking at how increased capital competes for multifamily investment as underwriting relaxes. The report cited that for the last quarter of the year, $2.8 billion worth of non-agency multifamily CMBS loans will be subject to refinancing upon maturity. In light of the impending wall of maturities, an additional $32.1 billion will mature in 2016 and 2017, constituting 12.8 percent of the total balance of maturing CMBS loans.

“Due to strong multifamily housing demand, occupancy levels are high for loans maturing in the next five years,” the report said. “More than 85 percent of reported loans maturing through 2020 currently hold occupancy levels greater than 90 percent. Less than 10 percent of those loans have occupancies below 50 percent. The property type’s generally strong occupancy and financial performance, coupled with the large maturing multifamily balance in the next two years, will serve as a pipeline for further multifamily CMBS issuance growth in the coming years.”