In Phoenix, thank Freddie Mac and Fannie Mae for the spike in multifamily values

By: James Dumars

We’ve not seen a recovery in the multi-family rental market but values have increased dramatically.  It’s easy to draw the positive correlation between lower interest rates and falling cap rates for multi-family.  

Multifamily owners have a significant advantage over owners of all other types of commercial real estate as they can access government guaranteed debt from Freddie Mac and Fannie Mae.  As I understand it, the investors who buy this debt on the secondary market are rewarded with higher yields than standard US Treasuries but receive the government’s guaranty on the bonds.   Consequently, recent Freddie Mac securitizations have reportedly been very successful as fund managers snap up the paper. �

A case in point: A specific property would have traded for a 6.25% cap rate a year ago.  The property recently went under contract at a 5.25% cap rate, which is approximately 20% more than it would have traded for a year earlier, despite the fact that rents have not increased.  The buyer obtained an agency mortgage with a fixed rate of 4.93% based on today’s closing treasury yield plus a spread of 197 basis points.  The buyer competed with 20+ other investors for the deal and was selected from a best and final of the top three.  The buyer, like many others, recognizes that the replacement cost of the Class A asset is $125,000 per door and he would likely have to go to the outskirts of town to build a similar property.  Buying the asset in the $90k per unit range provides him with upside in value and future rents once the oversupply is eventually absorbed.   He also locks in a very attractive interest rate on a fully assumable mortgage that can be increased in the future through supplemental funding.

I’ve seen this market transition from vulture buyers looking for multifamily to buyers who have raised funds and intend to build a presence in Phoenix.  The vultures have gone quiet as the opportunities they were waiting for have not materialized, thanks to the very competitively priced capital available from the agencies.

James DuMars, managing director/senior vice president for NorthMarq Capital’s office in Phoenix, has more than 20 years of experience resolving complex commercial financing issues. Contact James at (602) 508-2206 or