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Page 6 — Multifamily Properties Quarterly — May 2017
Financial Market
M ultifamily development
continues to surge across
the Front Range, with a
large amount of it being
Class A. This trend stands,
despite the sustained – and wid-
ening – gap in affordable product
available, while the demand for
Class B and C housing holds fast.
A number of variables within the
multifamily market, at the state
and national levels, continue to be
in flux. To gain some insights into
current trends, as well as top oppor-
tunities and obstacles in this space,
Jerry Green, with NCS Colorado,
spoke with Ralph Lowen of Walker
& Dunlop.
• Green. What do you see as some
of the largest overall trends and
opportunities within Colorado’s
multifamily space?
• Lowen. We see investors gravi-
tating toward value-add deals and
away from new Class A develop-
ment. The market sure feels satu-
rated at the top and returns are
getting thin. There is opportunity
in the affordable and moderately
priced part of the market where
demand is high and supply is tight.
The trouble has been in making
the numbers work at today’s con-
struction costs, which have doubled
over the last 10 years. Construction
costs were a major catalyst for the
recent boom in Class A develop-
ment. Developers couldn’t build
at the higher costs without higher
rents, so they all built Class A.
Investors seem to like value-add
deals because they can tap into
pent-up renter demand and find
attractive yield without biting off
too much costly
construction.
• Green. What
impact has the
presidential elec-
tion had on the
real estate market?
• Lowen. We saw
an immediate
impact on federal
low-income hous-
ing tax credits.
The new admin-
istration has tax
reform on the
agenda and this turned the tax
credit world upside down. If the
corporate tax rate goes down, so
will investor returns on tax credits.
If investors are not willing to pay as
much for tax credits, there will be
less equity available for new afford-
able housing projects.
We are seeing huge equity gaps in
affordable deals that were thin even
before the election. Many of these
deals are being abandoned. This is
a tragic consequence that will slow
new affordable development. The
most frustrating part is that we don’t
even know if tax reform will be suc-
cessful or where the ultimate tax
rate will fall. But the uncertainty is
too great and investors are pricing
accordingly.
The good news, despite these chal-
lenges, is that there are still some
affordable deals moving forward.
They tend to be the stronger deals
with various layers of subsidy. This
makes the lender’s job more impor-
tant too as borrowers need debt with
higher leverage and flexibility to off-
set reduced tax credit equity. Freddie
Mac, Fannie Mae
and the U.S. Depart-
ment of Housing
and Urban Devel-
opment will play a
significant role in
the near term for
affordable deals.
• Green. As the
Denver area and
Colorado region
continues to experi-
ence explosive and
consistent growth,
what specific chal-
lenges are you see-
ing?
• Lowen. My cli-
ents are having a
difficult time find-
ing deals and many are temporarily
on the sidelines. They just can’t get a
reasonable return at these lofty valu-
ations. In the past, investors came to
Denver to find value off the beaten
path. Now Denver is very much on
the national scene and local investors
are going elsewhere because pricing
and competition remains elevated.
The trouble is that so many multi-
family markets around the country
are experiencing the same thing, so it
is driving investors into even smaller
markets to find yield.
• Green. At a broad level, what
trends in financing are arising in
response to these changes across the
state?
• Lowen. Big picture – it is a great
time to borrow from nonbank lend-
ers. With banks still highly regulated
and skittish about over building in
Class A projects, nonbank lenders are
open for business.
Truly, it’s never been a better time to
borrow Fannie Mae and Freddie Mac
debt; they have available capital at
aggressive terms. They’ve also rolled
out various green programs that are
driving much more bang for the buck,
helping borrowers make their pricing
more aggressive and lowering inter-
est rates. Right now, nearly all of our
borrowers are taking advantage of
the green programs available through
Fannie Mae and Freddie Mac.
The HUD business also is strong
right now and it is a good time to be
a HUD borrower. Although not the
best fit for every deal, when the mar-
ket, deal and borrower all align, HUD
financing can bring the most aggres-
sive terms available – 85 percent loan
to value, 35- and 40-year amortiza-
tions and available construction debt.
Here I would definitely say, where
the bank door is largely closed in this
area, HUD has available construction
debt for developers.
• Green. That’s interesting about
the increased prevalence of green
programs by nonbank lenders, what
other products are on the rise?
• Lowen. Borrowers are looking for
loan products that cater to value-add
deals and prestabilization financing.
There is a ton of new apartment sup-
ply and it will all need permanent
financing. The prospect for rising
rates makes the need even greater to
exit variable rate construction debt.
Some great options exist right now
for newly built projects seeking per-
manent financing. Whether they are
stabilized or prestabilized, we are get-
ting these deals done with amazing
terms.
Ralph Lowen
Senior vice
president, Walker
& Dunlop, Denver
Jerry Green
Senior vice
president,
commercial
sales, National
Commercial
Services Colorado,
a div. of Fidelity
National Title
Group, Denver