Agencies’ Continuing Role in Financing Apartments
The F.H.F.A.’s assessments of agency health and the related cost to taxpayers matter for the future of housing finance and, by extension, for the apartment sector outlook, which is impacted by the direction of housing-finance reform efforts. The recovery’s cardinal markets, including New York, Washington, D.C., and San Francisco, have seen the agencies’ share of financing diminish as a wider range of lenders have responded to improving fundamentals. Still, a degree of crowding out—where nongovernmental lenders lose deals to preferentially priced agency financing—remains a factor limiting the balance-sheet gains of some banks and life companies. Some of these institutions have turned to financing apartment development as conditions demand greater risk-taking.
Outside of the cardinal markets, where apartment occupancy rates and rents are also generally rising, a range of regulatory and balance-sheet constraints on regional and community banks, combined with an unpredictable C.M.B.S. market that has seen little multifamily conduit activity, have resulted in agency financing’s maintaining its position as the dominant source of mortgages for sales and refinancing. That may remain the case for some time, even as housing-finance reform sees progress in refashioning the governmental role in the apartment sector.
Competition among lenders, and the very low cost of agency capital, has pushed debt yields to historic lows. Some market participants will cite relatively wider cap-rate spreads or positive leverage as mitigating factors in the risk analysis. But these arguments ignore that some recent deals would not be viable if interest rates were even 100 basis points higher. Invariably, cash-flow growth will have to remain strong and sustained to offset the impact of higher borrowing costs at exit. In markets or submarkets where the apartment-supply response is relatively sharp, that cash-flow growth is not assured even if the demand curve continues to shift out along its current trajectory.
dsc@chandan.com
Sam Chandan, Ph.D., is president and chief economist of Chandan Economics and an adjunct professor at the Wharton School.
