Fannie, Freddie Still Rule

Urbanization, appreciation, and painted ladies: It describes both the first season of Jerseylicious and our Second Annual Multifamily Summit at the St. Regis. Some 250 of you joined us last week.

Three years ago there was no bank financing, but Opus Bank president-income property banking Dan Borland says banks came right back into the multifamily space because it's a good bet. Pointing to long-standing sources Fannie and Freddie (which offer great taxpayer-subsidized rates) and the return of CMBS, he says ?There's room for everyone, and I think we're all just expanding our pie.? That said, there are borrowers who want the flexibility to prepay a loan but still enjoy a fixed rate. Also, those with earn-out needs may find it hard to get that from Fannie or CMBS.

Stein & Lubin partner Paul Niewiadomski moderated our first panel, dealing with capital markets and the debt/equity outlook. He says the Bay Area?s multifamily market will be strong because we have a recovering economy and limited options for expanding supply.

Veritas Investments founder Yat-Pang Au says there's a "huge valuation impact" in remodeling and generating more demand. Among the items Veritas adds to its classic, old painted ladies: in-unit washer/dryers, bicycle parking, car sharing, and solar electricity. (Based on the photo, we're hoping bottled water was a value-add.) He'd like to see much more rental housing stock in San Francisco to attract residents and businesses. This would knock down market rents a tad, ?but in exchange create a dense, more vital city.?

Bentall Kennedy SVP Jim Howard says many of the new projects have no any amenities other than being in San Francisco. ?People just like being in the city.? (However, the company's 754-unit project at 10th and Market will have a swimming pool.) One thing developers are doing to mitigate rising construction costs is build smaller units. Jim says there's a blip coming in terms of new multifamily supply in the form of larger, institutional projects, resulting in more transactional volume because some of the builders will sell on completion.

Walker & Dunlop VP Mark Plenge says Fannie and Freddie decided recently, for 2012 and beyond, to take their foot off the accelerator, but ?they're still going to be the fastest car on the track.? The agencies are dialing back on IO terms and on being ultra-aggressive in the strongest markets, but they're still providing more dollars and a much lower rate on fixed-rate loans than banks and CMBS. Mark says the best securitization vehicle for multifamily is the Freddie Mac CME or capital markets execution, which has been met with incredible demand, and don't forget FHA—rates are in the 2% range.

Marcus & Millichap regional manager Jeff Mishkin says San Francisco has legions of owners who made a ton of money on appreciation here. ?It's almost a guaranteed home run.? He remembers his disbelief that someone was paying $60k/unit, only to be further stunned at ever-increasing prices. Jeff's office just closed one at $626k/unit. Driving up Van Ness, the 1200 block of Market to the Castro, or out to the ballpark area, he says, you can see the city in the first real step of moving toward high-rise and upper-end construction.

Foreseeing a surge in household formation, Dan says that if you're an owner, fix it long and low because interest rates will likely be higher in the future. Pointing to San Francisco office rent spikes and transaction volume of large building sales over the past year, Jim thinks some of that could happen in multifamily—"just a step behind." Jeff believes San Francisco will start to become more like Chicago as a condo city (except for having a World Series champion).

Fannie, Freddie Still Rule

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