By Peter Vanderpool, president,
Cignature Realty Associates
Lenders and investors remain focused on multifamily properties as they seek commercial real estate opportunities, particularly in New York City.
The Mortgage Bankers Association reported recently that multifamily lending rose 36% in 2010 compared to 2009 and that the trend was continuing into 2011.
The MBA and other organizations that keep track of such statistics further believe that, going forward beyond 2011, banks will continue to keep their sights on the apartment market.
The Federal Reserve Bank’s recent surprise announcement that it will keep interest rates low for at least two more years certainly supports that notion.
Meanwhile, for over a year, banks had been steadily reducing their inventories of commercial real estate loans, but in April, for the first time, banks reported an increase of nearly one billion dollars in the amount of CRE loans on their books. This was a strong sign that banks are getting back into the game.
Another reason for the strength in the multifamily segment is that the consistently low vacancy rates in apartment buildings provide a safety net, particularly during periods of economic uncertainty.
In addition, recessionary pressures continue to have a beneficial effect on the apartment market to a large degree, particularly since there is a distinct, much-publicized threat that the recession will linger for quite a while longer.
As we have previously noted: “The number of renters seeking apartments is at its highest level in more than a decade as more families opt for apartment life rather than home ownership as a means of containing living costs.”
Throughout the country, the number of families living in their own homes has fallen from more than 69% to about 65% since 2004. In New York City, more than two-thirds of households live in rental apartments. And, while at the nationwide level the multi-family vacancy rate has dipped about two percent to a little more than 9%, in Manhattan, for example, the vacancy rate, including stabilized apartments, hovers this summer at or below one percent.
Of course, the banks remain concerned about the reputation and experience of its borrowers and, after the “run-away” conditions that existed through 2007 in the commercial real estate market, they are tightening their lending standards.
That having been said, reasonable loan-to-value ratios and low vacancy rates combined with proven management ability on the part of a borrower provide the banks with a sense of security and confidence. But the cloudy business climate and lower levels of consumer confidence continue to be a drag on the office and retail segments of the commercial real estate market.
The Federal Reserve notes that “vacancy rates on office, industrial, and retail properties have remained at elevated levels at the end of 2010, ranging between 13% and more than 16%, depending upon the property type and location. These levels are, on average, 5 to 6 percentage points above levels experienced in 2007.”
Another thing the multi-family segment of the market has going for it is the fact that considerable headway has been made in less time than expected in selling off distressed assets, which were composed in large part of apartment buildings that were in or close to default.
As the recession picked up steam starting in 2008, distressed assets in Manhattan alone hit a peak of $30.6 billion, according to Crain’s New York Business. More than half of those properties have been sold and that the figure is now $15.2 billion, including one parcel that accounts for some $5 billion of that amount—Stuyvesant Town/Peter Cooper Village.
Surely, it is not all good news that we are hearing. The rating agencies are giving some banks and investors the jitters by speculating on the possibility that the country is headed into another recession.
In fact, Moody’s thinks there is a 33% chance of that happening. And then there is the bitter, partisan infighting going on in Washington over debt, deficits, spending cuts and taxes that is causing uncertainty in the marketplace.
But, the moneymen — including the banks, pension funds, insurance companies and domestic and foreign investors — are at a loss as to what to do with their caches of cash. Government and corporate bonds aren’t paying much in the way of interest these days; they provide safety but they offer meager returns.
Thus, the higher yields that can be achieved by putting their funds to work productively in the commercial real estate market becomes ever more attractive.
It’s not exactly a safe haven like gold, but it is pretty close, particularly if you’re savvy enough to pick the right properties.