Rent Trends And Multifamily News

Toilet Seat Painting:

My wife, Bubbles, had been after me for several weeks to varnish the wooden seat on our toilet. Finally, I got around to doing it while Julie was out. After finishing, I left to take care of another matter before she returned.

She came in and undressed to take a shower. Before getting in the shower, she sat on the toilet. As she tried to stand up, she realized that the not-quite-dry epoxy paint had glued her to the toilet seat.

About that time I got home and realized her predicament. We both pushed and pulled without any success whatsoever.

Finally, in desperation, I undid the toilet seat bolts. Bubbles wrapped a sheet around herself. I drove her to the hospital emergency room.

The ER Doctor got her into a position where he could study how to free her. (Try to get a mental picture of this.)

Bubbles tried to lighten the embarrassment of it all by saying, "Well, doc, I'll bet you've never seen anything like this before."

The doctor replied, "Actually, I've seen lots of them...... I just never saw one mounted and framed."

 

Zillow is predicting that the rental market will cool down this year. Median U.S. rents grew at a 3.3 percent annual pace in December, to $1,381 per month. This pace is expected to drop to 1.1 percent by December 2016, with median rents rising to $1,396 per month. New apartments being built in markets like Seattle and Washington D.C. is evidence of builders trying to keep up with the demand. As more apartments become available, rent prices should begin to decline, and it's expected that rent may drop this year in some markets like Indianapolis, Oklahoma City and Las Vegas. Although, rental decline is not expected to drop on the West Coast, as rent in L.A. is expected to rise 2.8 percent this year and 5.9 percent in San Francisco. Overall, rents on a national level will not rise as quickly as they have been and this year's expected hottest markets like Omaha, Boise and Richmond will have a balance between strong income growth, low employment and affordable rent.

Now, about rents and multi-family trends... did you know that Bloomberg reports that between 2011 and 2015 loans for multi-family developments at insured depository institutions increased 45% and made up 17% of all commercial real estate loans held by financial institutions. Regulators have indicated this will be one area they will be closely reviewing when they exam banks in the coming year.

 Fannie Mae and Freddie Mac expect to break more records this year in their lending on multifamily properties. That means both agencies will have to keep up the tremendously busy pace they set in 2015. And Greystone has provided $18 million in Fannie Mae MAH loans to refinance three affordable apartment communities owned in Tacoma, WA. The three properties are in Lakewood Village, Chateau Rainier and DeMark Apartments. The loan has a 30-year term with a fully amortizing schedule, which includes 477 units and has floor plans ranging from one to three bedrooms.

 "What's the deal with the rising multifamily market?" That was the question being asked at a recent gathering I attended. Well, pick your poison: a large portion of aging boomers are choosing to downsize and live in housing communities, millennials prefer the flexibility of renting over owning, gross underemployment has created economic barriers to potential buyers, stagnant wages haven't kept pace with inflation, etc. That question could be the world's worst road trip game, next to license plate poker. Needless to say, the American consumer is demanding more multifamily dwellings.

 According to the NAHB, multifamily housing starts, at the end of 3Q15, were at a decade long high, with 425,000 starts. So, where do all the cash flows from this sector end up? In mortgage backed securities, specifically Multi-Family Mortgage Backed Securities (MF MBS), and the agencies have an integral part in the process. FNMA, FHLMC, and GNMA makeup a large portion of the $1Trillion secondary market for these products with market shares of: 26%, 24%, and 10%, respectively (other market participants include CMBS, Banks/Thrifts, Life Insurance Co's, and State/Local Agencies).

 Multifamily loans are made to borrowers under varying terms, such 10 years, 7 years, fixed-rate, adjustable-rate, full or partial interest only periods. During the life of a multifamily loan, the balance is generally amortized over an amortization term that is significantly longer than the term of the loan. As a result, there is little amortization of principal, resulting in a balloon payment at maturity. The borrower usually repays the loan in monthly installments that may include only interest for the entire term of the loan, only interest for a portion of the term and then both principal and interest, or principal and interest for the entire term of the loan.

 MF MBS are often issued with prepayment penalties that protect the investor in case of voluntary repayment by the borrower. Prepayment protections are most frequently in the form of lockout periods, defeasance, prepayment penalties or yield maintenance charges. For those interested in these features, here's how each works. Lockout Periods: A prepayment lockout is a contractual agreement that prohibits any voluntary prepayments during a specified period of time, the lockout period. After the lockout period, some instruments offer call protection in the form of prepayment penalties. Defeasance: With defeasance, rather than loan repayment, the borrower provides sufficient funds for the servicer to invest in a portfolio of Treasury securities that replicates the cash flows that would exist in the absence of prepayments. Prepayment Penalty: Prepayment penalty points are predetermined penalties that must be paid by the borrower if the borrower wishes to refinance. FNMA notes, "for example, a 5-4-3-2-1 prepayment penalty point structure means if the borrower wishes to prepay during the third year, the borrower must pay a 3% penalty for a total of $103 rather than $100." Yield Maintenance Charges: A yield maintenance charge is the most common form of prepayment protection for multifamily loans/securitizations. It is basically a repayment premium that allows investors to attain the same yield as if the borrower made all scheduled mortgage payments until the maturity of the security. Yield maintenance charges are designed to discourage the borrower from voluntarily prepaying the mortgage note. The yield maintenance charge, also called the make-whole charge, makes it uneconomical to refinance solely to get a lower mortgage rate.

 Loan servicing is pretty straight forward. The mortgage bank or a third party may service multifamily loans going into an agency MF MBS. The master servicer is responsible for day-to-day loan servicing practices including collecting loan payments, managing escrow accounts, analyzing financial statements inspecting collateral and reviewing borrower consent requests. All non-performing mortgages are usually sent to the special servicer. The special servicer is responsible for performing customary work-out related duties including extending maturity dates, restructuring mortgages, appointing receivers, foreclosing the lender's interest in a secured property, managing the foreclosed real estate and selling the real estate.

 The MBA has released its Third Quarter 2015 Commercial/Multifamily DataBook highlighting that the national economy has grown at a seasonally adjusted annual rate of 2 percent during the third quarter, after already having grown 3.9 percent in the second quarter. The unemployment rate also declined to 5 percent in October due to an increase in job growth. The commercial mortgage borrowing and lending sector increased in the third quarter, and commercial and multifamily debt outstanding also rose the same quarter. Banks contributed to 85 percent of the total increase, adding $32 billion to their holdings of commercial real estate loans, which is the largest amount since 2007. Total commercial/multifamily debt outstanding debt reached $2.76 trillion at the end of the third quarter, an increase of $38 billion. Multifamily mortgage debt outstanding stood at $1.02 trillion, increasing 1.9 percent from the previous quarter.

 Turning to bonds & rates, I love it when the Fed says that inflation remained subdued and global economic conditions are uncertain.  When aren't global economic conditions uncertain? Yesterday U.S. Treasuries recovered their pre-FOMC losses as investors appear to have been braced for a hawkish surprise from the Fed. The FOMC held rates steady, as was widely expected, and also failed to change its language with respect to falling energy prices despite significant declines since the FOMC's December meeting. The statement also said that the committee is "closely monitoring" global financial and economic developments.

 The 5-year Treasury auction met a poor reception (after a lackluster 2-year auction on Tuesday) but the focus was on the overall bond market. It "traded heavy" throughout the morning/early afternoon until the FOMC statement after which everyone focused on the dovish tilt to the statement. This quickly "gave a bid" to Treasuries which in turn helped rates but pushed the stock market lower.

 Not that the markets care about our actual data anymore, but we've had Initial Jobless Claims for the week ending 1/23 (278k, down from 294k), and December Durable Goods and Durable Goods ex-transportation (-5.1%, worse than expected, and -1.2%). Coming up is more housing news, with December's Pending Home Sales, and a $29 billion 7-year Treasury auction. For numbers once again this week the 10-year's yield ended the day at an even 2.00%, well below where it was when the Fed raised short term rates, and this morning we're at 1.99% with agency MBS prices better by .125.