Main Takeaway: The multifamily market fundamentals are slightly moderating. Although we are witnessing more volatility and a possible recession in the coming 12 months, the multifamily sector is positioned extremely well, with most forecasts showing solid performance for the coming years despite the current lending deceleration.
Story: Rapid inflation has caused interest rates to rise faster than most expected from historical lows. Despite feeling high, interest rates are still sitting at relatively low levels compared to historical data.
Source: FRED
That said, the sharp increases in interest rates have reduced the momentum of multifamily lending, and have sidelined some deals as investors wait for equilibrium to improve and volatility to decrease. In fact, recent data shows the overall mortgage industry is facing a record decline, seeing its lowest demand in over 22 years.
The State of Multifamily Lending
By most accounts, 2021 was a record year for multifamily due to strong demand and record-low interest rates. According to the MBA, lending in this sector hit a high of almost half a trillion dollars in 2021, well over 2020’s total of $359 billion.
Jamie Woodwell, VP of commercial real estate research at the MBA, commented on this volume, noting that “solid property fundamentals, rising values, low-interest rates, and strong demand from every capital source,” were the reason for the healthy and robust multifamilymarket.
Heading into 2022, Freddie Mac recently released its 2022 Midyear Multifamily Outlook. They note that higher Treasury rates will put minor upward pressure on cap rates and downward pressure on valuations. This will force many lenders to tighten underwriting and ultimately decrease loan volume.
According to the report, “[g]iven the higher degree of economic uncertainty and volatile Treasury rate environment, we expect a slight contraction in total origination volume in 2022 to $440-$450 billion, but strength in underlying multifamily fundamentals will continue to attract investors.”
Source: Freddie Mac
Despite cap rates and rents being stickier and will take time to adjust to the current environment, loan volume has immediately responded to the higher rates. MBA’s latest forecast also sheds a light on the deceleration of lending, with multifamily expected to decline 10% in 2022 to $436 billion, but rebounding to $454 billion by next year.
Further, a recent CBRE report notes that rising inflation and interest rates have cooled commercial lending in Q2 2022 due to more selective underwriting. As a result, the CBRE Lending Momentum Index declined 7.9% quarter-over-quarter. As a result, multifamily loan-to-values are also decreasing according to CBRE:
Source: CBRE
All of this data points to further lending deceleration in the multifamily market. That said, outside of a deep recession, this sector according to all analysts is robust and in high demand despite current economic headwinds.
Multifamily Lending Expert Take
“Today we’re at something of an inflection point. Inflation risk and recession fears have many debt providers tightening or closing up. At the same time, we have a negative leverage issue with note rates catching up to, and in some cases surpassing, cap rates which have been trending down for some time. Fewer deals seem to pencil as interest rates surpass investment returns. As a result, the market is in a period of transition.” — Kevin Palmer, Senior Vice President and Head of Multifamily, Freddie Mac
“After a record start to the year, we expect that the rise in rates, ongoing uncertainty about supply and demand balances among some property types, and concerns about the direction of the economy will suppress new loan originations in the second half of the year. Most commercial real estate market fundamentals remain strong, with significant increases in the incomes and values of many properties in recent years. These factors are why MBA expects loan demand to begin to bounce back in 2023 and 2024.” — James Woodall, MBA
