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Page 16 — Multifamily Properties Quarterly — August 2019 www.crej.com Lending P lanning is paramount in devel- oping strategic initiatives, increasing flexibility and reduc- ing risk across all businesses and industries, including multifamily. As we pass the midyear milestone, reflecting on the multifamily market is a worthwhile endeavor for all developers, investors and lenders as they plan their next moves.With this in mind, our multifamily discussion will focus on key data trends, regulatory environment headwinds and capital market considerations as we officially enter the longest economic expansion in U.S. history. It is no secret that as an asset class multifamily performance has outper- formed expectations. In assessing cur- rent metro Denver data you might even get the sense that there is still room to run. For instance, according to the Cary Brueteig’s Apartment Insights Second Quarter 2019 Report, vacancy decreased by 80 basis points to 5.23%, positive absorption tallied 3,670 units, and rents rose 4%, surpassing $1,500 per unit ($1.75 per square foot). All this while Denver continues stag- gering levels of multifamily develop- ment activity, evident by the full year 2019 projected delivery pace of over 16,000 units across more than 80 proj- ects. Reviewing submarket activity, the Denver central business district has over 5,000 units currently under con- struction, roughly 120%more than the next most active submarket. However, development is truly widespread as 10 submarkets currently register over 1,000 units under construction. Fears of oversupply are always valid, especially when metro Denver’s total pipeline of units under construction exceeds 27,500 units. With Federal Reserve Chairman Jerome Powell signaling dov- ish monetary policy moves, multifam- ily developers and investors are push- ing forth.The expec- tations have been set that our low- capital-cost environ- ment will remain. Furthermore, the expectations are that the sheer volume of capital that exists today in the multifamily sector will remain, thereby softening any land- ing experienced by local imbalance of supply/demand.These expectations do have merits, but they also could be labeled as just assumptions, which sounds more slippery. Beyond unknowns of capital avail- ability and interest rates, our multifam- ily regulatory environment provides another layer of uncertainty. Agency reform of Fannie Mae and Freddie Mac, rent restrictions and capped-growth initiatives are all issues playing out in Washington, D.C., and throughout vari- ous local municipalities. Mark Calabria, director of the Federal Housing Finance Agency, is expected to propose a structure to exit from conser- vatorship of the government sponsored enterprises of Fannie Mae and Freddie Mac. Recent reports indicate that the privatization proposal could come as early as September. Anytime you have market players that combine for $143 billion in multifamily origination vol- ume, as Fannie Mae and Freddie Mac did last year, a potential disruption to this market liquidity will have conse- quences. While agency reform is inevitable, actual implementation of a congres- sionally approved privatization pro- posal won’t happen overnight. Priva- tization allows taxpayer exposure to be reduced, but without the implicit guarantee of the federal government, bond investors will require a premium on spread to compensate for the addi- tional perceived risk. In a legal sense, the GSEs are quasi- private corporations chartered by Con- gress and with private shareholders. These private shareholders also have their own interests to protect, and would resist any sort of secondary pub- lic offering, which would dilute their share value.When balancing these inherent competing interests, you need to have a seat at the table.Thankfully, via the Mortgage Bankers Association, the real estate finance industry is able to maximize political strength and send a strong, collective and clear mes- sage on behalf of our industry to key policymakers. Until the puzzle pieces of agency reform are known, confidence should remain in the multifamily capital mar- kets as the cost of capital appears to be on the unbelievable path of getting cheaper. The 25 basis point Fed Funds rate cut and expected additional fund rate cuts prior to year end will continue to put downward pressure on short term rates. At the time of submission, the yield curve between the 10-year U.S.Treasury and the three-month Libor was already inverted, so long- term, fixed-rate debt is still very attrac- tive, and quite frankly could become even more attractive as global econom- ic weakness persists, pressuring the 10 Denver apts.: Climate change or just weather? Jeff DeHarty Vice president, producer, NorthMarq Please see DeHarty, Page 35