The Expert: Debt, Equity & Property Pricing

Government agencies continue to be the primary source of financing for multi-family assets, and though both Fannie Mae and Freddie Mac have been consistently widening their spreads, in part to offset the plummeting indices, they remain the most consistent and competitive source of capital in the commercial real estate market.They are now acting more like market makers than government agencies, developing new programs and adjusting their rates and lending criteria frequently in reaction to the volatile markets. Freddie is pricing deals 25 or 30 basis points inside Fannie but is arguably more discriminating and wary of overbuilt markets. Both agencies debt-service-coverage ratios range from 1.2 to 1.35 times on in-place cash flow, and all-in coupons are 6 percent, though better floating rates are available under certain programs. Loan-to-value ratios are still theoretically 80 percent in many markets, though other covenants, such as debt-service-coverage ratios, usually create the primary restriction on proceeds.Outside the agencies, banks remain reluctant to lend until they can better evaluate credit risk and fundamental asset value and get their own houses in order. The insurance companies have all but packed up their 2008 tents as they wait to receive their 2009 real estate allocations. To be sure, mezzanine financing is available and relatively plentiful with pricing in the low and middle teens.Raising equity remains challenging for all asset classes, and multi-family is no exception. Though multi-family has the significant advantage of consistently available debt, investors continue to be risk averse and prefer the relative safety of senior debt, and they are reluctant to venture out toward the equity end of the risk spectrum. As long as yields on triple-A bonds hover in the double digits, investors will find it difficult to justify taking equity risk. Higher cap rates and readily available financing should ultimately persuade equity investors to return to asset acquisition mode, but at the start of 2009, debt provides much more compelling risk-adjusted returns.