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Page 4 — Multifamily Properties Quarterly — August 2017
Market Update
H alfway through 2017 and
it is business as usual
in Denver’s multifamily
market. On the heels of
a record 2016 with sales
volume eclipsing $6.6 billion, the
multifamily investment sales mar-
ket is chugging along at a steady
pace. Since the beginning of 2015,
quarterly multifamily sales volume
in the metro Denver region aver-
aged approximately $1.15 billion,
while the first two quarters of 2017
averaged $935 million (50 units
and greater). The slow start to the
year was not limited to multifam-
ily, as the capital markets slowly
settled into a new normal after
the presidential election in late
2016. The spike in treasuries sent
quoted interest rates on long-term
debt skyrocketing as lenders held
spreads, uncertain how the dust
would settle in the new year.
By mid-February, at the annual
Mortgage Bankers Association con-
ference, the dust had settled as
buyers and lenders alike accepted
the new environment and got
back to business. Spreads adjusted
downward as the treasuries sta-
bilized, and the market geared up
for another year of healthy activity.
For perspective, the post-election
10-year Treasury has fluctuated
between 2.14 to 2.62 percent com-
pared to 2016 (pre-election) when
the index bounced between 1.4 and
2.25 percent.
Fast forward to August and
although the Denver market is on
a slower (but probably more real-
istic) pace than 2016, there is still
plenty of liquidity in the market for
multifamily debt.
Freddie Mac’s new
business volume
trend showed that,
despite the slow
start to the year,
loan origination
was only off 1 per-
cent through the
second quarter
when compared to
the same period in
2016.
Denver metro
multifamily
remains a preferred asset class for
lenders and investors as the econ-
omy booms and people continue to
move here in search of opportuni-
ties in employment and in lifestyle.
Though the state legislature has
taken steps toward reforming con-
struction defect laws, new condo-
minium activity has been almost
nonexistent. The single-family
home sector is increasingly com-
petitive and a scarcity of new prod-
uct has benefitted the apartment
market.
Lenders from all food groups have
deployed billions of dollars for new
construction, rehabilitation projects
and long-term, fixed-rate debt for
stabilized properties over the last
few years. Construction financ-
ing faces the strongest headwind
at this point in the cycle, primar-
ily due to tightening regulations
in the banking space coupled with
lender exposure limits tied to the
dramatic amount of new supply.
The seven-county metro area has
welcomed over 31,000 units since
the beginning of 2014 with an
additional 21,700
units under con-
struction and an
additional 18,700
units on the draw-
ing board. While
the increased
supply seems
to be absorbing
steadily, lenders
have expressed
concerns about
increasing conces-
sions and flatten-
ing rent growth,
particularly in the
urban core. Obtaining construction
financing is as challenging as devel-
opers have experienced during this
cycle with lenders ratcheting down
on leverage, introducing higher lev-
els of recourse beyond traditional
completion guarantees, and some
pulling out of new construction
altogether.
Those developers successfully
obtaining construction financing
have experienced higher costs of
capital with Libor, the universal
index for floating-rate debt, creep-
ing higher and higher each time the
Federal Reserve has raised interest
rates. At the time this article was
written, the UK Financial Conduct
Authority announced that Libor will
be eliminated by the end of 2021.
That, however, is a topic deserving
of its own article.
The government-sponsored enti-
ties, Freddie Mac and Fannie Mae,
remain bullish on the Denver mul-
tifamily market and continue to
remain the most popular options
for multifamily debt. In 2016, Fred-
die Mac, with $56.8
billion in loan orig-
inations, narrowly
outpaced Fannie
Mae at $55.3 bil-
lion, both of which
were new records
for each entity. The
GSEs or “agencies”
are attractive for
borrowers, offer-
ing high-leverage,
fixed- and floating-
rate options, typi-
cally with an inter-
est-only component. Although pre-
payment penalties typically include
yield maintenance or defeasance,
the ability to add supplemental
loans enhances the assumption
process by giving buyers the ability
to push leverage.
Life insurance companies have
adjusted spreads to solve to pre-
election interest rates with 10-year
money as low as 3.5 percent for
low-leverage multifamily. The ability
of life companies to provide long-
term money, up to 40 years in some
cases, makes them an attractive
option for long-term legacy assets.
The commercial mortgage-backed
securities space has seen demand
come and go for multifamily. These
lenders capitalized in 2015 when
the agencies hit the brakes around
second quarter after outpacing their
allocation targets early in the year.
Multifamily loans now are few and
far between in the CMBS space with
the agencies competing fiercely for
new business. The number of bridge
Jeff Halsey
Vice president,
capital markets,
CBRE, Denver
Brady O’Donnell
Vice chairman,
capital markets,
CBRE, Denver
Jill Haug
Vice president,
capital markets,
CBRE, Denver