CBRE Capital Markets Multifamily Finance Update

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• Happy new year. May you have a productive and enjoyable 2020.
• A decade ago, the U.S. and the multifamily market were just coming out of a recession. The national GDP had fallen 2.5% in 2009, but then spent the next decade expanding, climbing 2.3% per year on average.
• Multifamily vacancy rates peaked in 2009 at over 7% nationally compared to 3.6% at Q3 2019. Rents fell 6% in 2009 and then started to rise in 2010. Rents have been climbing at an average annual rate of 3.3% annually for the past 10 years, and the most recent year-over- year growth figure (Q3 2019) places rent growth at 2.9%.
• Neither the U.S. economy nor the multifamily market has enjoyed such an extended period of expansion in decades. The big question for 2020 is: will both expansions continue? We believe they will.
• Most economists, including those with CBRE, are projecting tepid economic growth in 2020 – a GDP of about 1.8% compared to 2019’s estimated 2.3%. In the last few months of 2019, the economic road signs have been more positive than earlier in the year, and that could translate into slightly higher growth. (In October, the Wall Street Journal’s survey of economists reported that 34% expected a recession within a year. In December that figure was 25%.)
• With sustained economic expansion will come further employment growth. However, labor shortages will continue to serve as a restraint on job growth. Unemployment will remain low though edge up slightly, and wage growth is likely to stay around its current level of 3.1%.
• Will the Federal Reserve raise the Federal Funds rates in 2020 – or lower them? Unlikely to see adjustments in either direction in the first half of the year. The economy will likely be considered neither too hot nor too cold for the Fed to make changes at least early in the year.
• Multifamily has two powerful trends on its side as the market enters 2020. First, demand forces are driven increasingly by lifestyle choices. The 2010s decade brought a hugely important secular change to demand; multifamily became a lifestyle choice to millions of households not just an economic choice. The new product built during the decade in both urban and suburban locations helped to enhance the appeal of multifamily as a lifestyle choice as well.
• Second, the cost of buying a new or existing single-family home rose steadily through the 2010s decade, making homeownership financially more difficult to obtain for many younger households, especially if they also carried student debt.
• Both of these trends will continue through 2020, giving the multifamily market another year of strong market demand. We anticipate net absorption of at least 240,000 units for the 66 major markets tracked by CBRE Econometric Advisors.
• Multifamily construction also will remain active. Completions in 2020 will mirror 2019’s 280,000 units. Multifamily permits and starts will begin to taper off in 2020, but the declines will not be dramatic despite developers’ challenges with still rising development costs especially from labor shortages, and low returns on cost.
• In 2020, vacancy rates are likely to inch up modestly (20 basis points to 4.5%), but still remain under the 25-year average of 5%. Rental growth will likely edge down to 2.4%, just under the long-term average of 2.6%.
• Housing affordability will remain a key topic in 2020. The good news is that in most markets the problem is not getting worse based on income-to-rent statistics. Furthermore, industry and policy makers continue to seek solutions. Unfortunately, some of the solutions from policy makers, like rent control, typically create disincentives to development further exacerbating the situation. Yet, other policies like higher-density zoning provide builders with new development avenues to help the overall supply/demand imbalance.
• Multifamily alternatives will also remain part of the conversation in 2020. Single-family rentals, especially build-to-rent communities, co-living, active adult housing and manufactured housing communities will remain of interest as avenues of development or investment potential and perhaps new competition.
• All-in-all, 2020 is shaping up to be another excellent year for U.S. multifamily housing for both market fundamentals and investment activity.

• • • FREDDIE MAC

      Fixed Rate Pricing

      Leverage 1.25x/80%			1.45x/60%
      Term	Spread	Rate	Spread	Rate
      5 year*	N/A	N/A	1.70% – 1.95%	3.29% – 3.54%
      7 year	2.00% – 2.25%	3.70% – 3.95%	1.65% – 1.90%	3.35% – 3.60%
      10 year	1.90% – 2.20%	3.68% – 3.98%	1.60% – 1.85%	3.38% – 3.63%

      Pricing based on standard yield maintenance/defeasance.
      *DSCR/LTV parameters may vary on 5 year structures.

      Floating Rate Pricing

      Leverage 70% Term Spread Rate 7 year ARM 2.30% 4.01% Priced over 1 month Libor. Standard prepay consists of 1 year lockout, 1% thereafter. Third party interest rate cap required.

      

      • • FANNIE MAE

      Fixed Rate Pricing

      Leverage 1.25x/80%			1.35x/65%
      Term	Spread	Rate	Spread	Rate
      5 year*	2.30% – 2.40%	3.89% – 3.99%	2.15% – 2.25%	3.74%- 3.84%
      7 year	1.99% – 2.09%	3.69% – 3.79%	1.84% – 1.94%	3.54% – 3.64%
      10 year	1.90% – 2.00%	3.68% – 3.78%	1.75% – 1.85%	3.53% – 3.63%
      12 year	2.05% – 2.15%	3.83% – 3.93%	1.90% – 2.00%	3.68% – 3.78%

      Pricing based on standard yield maintenance.
      *DSCR/LTV parameters may vary on 5 year structures.

      Floating Rate Pricing

      Leverage 75%
      Term	Spread	Rate
      10 year SARM	2.40%	4.11%
      7/6 ARM*	2.49%	4.20%

      Priced over 1 month Libor. Standard prepay consists of 1 year lockout, 1% thereafter.
      Third party interest rate cap required. *Embedded cap with max rate of 7.54%.
    • • • FHA

  	Term	Leverage*	Spread (10-YR T)	Rate**
  Apartment New Construction	40	1.17/85%	2.37%	4.15%
  Apartment Refinance	35	1.17/85%	1.73%	3.51%
  Healthcare New Construction	40	1.45/75%	2.89%	4.67%
  Healthcare Refinance	35	1.45/80%	2.13%	3.91%

  

  Pricing based on lock out for 1 year, then 9%, 8%, 7%, 6%, 5%, 4%, 3%, 2%, 1%, 0% thereafter. Over the yield of 10-year treasuries. Includes mortgage insurance premium of 0.60%-0.77%; affordable and green transactions have lower MIPs of 0.25%-0.35%; based on estimated spreads and actual treasury yields at time of quote sheet preparation.
  *Affordable projects. Affordable transactions have lower DSC and higher loan ratios than Market rate projects.
  **Rate includes MIP. Assumes Green housing qualifications.

Fixed Rate Pricing (May be subject to 3.00%-3.50% floor rates) Leverage 65% Leverage 50% Term Spread Rate Spread Rate 5 year* 1.45% – 1.90% 3.04% – 3.49% 1.25% – 1.55% 2.84% – 3.14% 7 year 1.40% – 1.80% 3.10% – 3.50% 1.20% – 1.50% 2.90% – 3.20% 10 year 1.40% – 1.75% 3.18% – 3.53% 1.20% – 1.50% 2.98% – 3.28%

Floating Rate Pricing Leverage 70% Leverage 55% Term Spread Rate Spread Rate 3-5 years* 1.50% – 1.75% 3.09% – 3.34% 1.25% – 1.50% 2.84% – 3.09% 5-7 years 1.50% – 1.75% 3.14% – 3.39% 1.25% – 1.50% 2.89% – 3.14%

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(click on the following link for more information)

www.cbre.com/multifamily