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Institutions Look To Pour More Money Into Multifamily, But Coronavirus, Construction Costs Aren't Helping

Following a banner year for the multifamily sector during which institutions poured billions of dollars into apartments, large investors and lenders hope to continue increasing their multifamily deal volume in 2020.

But as the first year of the new decade begins to take shape, it appears increasing institutional capital flow may not be as easy as many hope. Fears of a global pandemic are shaking the economy, a looming election is causing uncertainty, local rent regulations and rising construction costs are putting pressure on multifamily, and an abundance of capital competing for deals could make it harder for individual firms to reach their goals. 

The Greystar-developed EXO Apartments in Reston, Va.

Nuveen Managing Director Jason Hernandez, who leads the TIAA subsidiary's real estate debt business, said the firm placed about $6.5B in U.S. loans last year and hopes to reach as high as $7.5B this year.

The firm's D.C.-area transactions last year included a $145M financing deal for Greystar's EXO apartment building in Reston, he said. Hernandez, who will speak March 26 at Bisnow's D.C. Capital Markets & CRE Finance event, said Nuveen also aims to grow its equity platform and is especially bullish on multifamily. But he says it is not alone.

"If you look at the overall market, talk to 10 or 20 lenders, they'd all expect to do the same or slightly more," Hernandez said of the multifamily sector. "That all assumes things don't slow down because of the election and coronavirus doesn't impact the transaction space ... it's really dependent on what's happening with the market.  If transaction activity dries up, we'll probably do less."

Walker & Dunlop Senior Vice President Sheri Thompson, who leads its multifamily lending practice through the U.S. Department of Housing and Urban Development, said 2019 was a strong year for the firm, especially in multifamily lending. It recorded its highest-ever overall transaction volume of $32B, including $8B in Fannie Mae loans and $6.4B in Freddie Mac loans. 

Thompson sees positive apartment market fundamentals that should provide momentum in 2020, but she also sees headwinds that could make multifamily development deals more difficult to move forward. 

"The current geopolitical climate is causing significant uncertainty, and it's unpredictable," Thompson said. "Part of the effects of the last year have been rising construction costs, and the potential pandemic going global could increase construction costs."

The Kodak Crossing project in Tennessee, a project for which Walker & Dunlop arranged opportunity zone financing last year.

The cost of building apartments has been magnified by local regulations that aim to take on the affordable housing crisis but actually present impediments for developers, Thompson said. New York, California and Oregon all passed some form of rent control measures last year, and multifamily investors have said they see the spread of these regulations as the biggest risk to the industry. 

"The cities are almost disconnecting the two and not understanding the consequences that some of these requirements could drive up the cost of housing, and that disconnect can really drive down affordability in a project," Thompson said.

German financial company Allianz Real Estate grew its U.S. equity and debt deployment to more than $3B last year, the company announced in December. Allianz co-head of debt investments Mike Cale said the firm aims to continue expanding both sides of the business in 2020. 

“The focus is on increasing our debt business in the U.S. and growing our equity platform as well,” Cale said.

Cale said Allianz continues to be bullish on multifamily, but he also sees rent control as a risk that could make some major U.S. cities less appealing for multifamily investors. 

"It is very important in larger gateway markets that tend to be more expensive with a higher cost of living, it is a lot more problematic," Cale said of rent control. 

MetLife Investment Management Managing Director Jeanine Lester said multifamily is one of the firm's top targets this year because demographic trends favor rental housing. But she said local policy changes around rent regulations also present a concern.

"We underwrite the tax, rent restriction and rent control policies in place, but it is more challenging when there is uncertainty around where these levels will be," Lester wrote in an email. "However, it hasn’t deterred us from looking at opportunities in any of these markets."


Increased competition in the market has also made it more challenging for capital providers to reach their target deal volumes. As Fannie Mae and Freddie Mac pour billions of dollars into the multifamily sector, Cale said it can be hard to find enough projects to finance.

"The challenge we have with the multifamily space is we're competing with the agencies, which are very aggressive in the arena," Cale said.

Hernandez also said competition is among Nuveen's top challenges in meeting its capital allocation goals, but he is most worried about other debt funds. A proliferation of debt funds has led to more than 180 of them competing for deals, he said, adding that an ideal market would only have about 20. The increased competition has put downward pressure on returns, he said.

"The thing I'm most concerned about isn't the state of the market, it's that there's an oversupply of capital," Hernandez said. "There's too much capital chasing too few deals today."

The number of deals to chase could be even further reduced if real estate companies take a wait-and-see approach ahead of the November election. Past election years have experienced a dip in activity, and executives say the wide-ranging policy differences between the candidates could create even more uncertainty this year. 

"We're focused on the election and what happens in June and July when both parties have a nominee," Hernandez said. "It depends on who gets nominated and do people see the status quo or something different, and does that impact transactions."

Thompson said the election could determine the fate of GSE reform and potentially privatizing Fannie Mae and Freddie Mac, and this uncertainty could impact the market in the months leading up to November. 

"There are a lot of conversations about privatization," Thompson said. "A lot of that hinges on the election. This year is looking really strong, but as we move closer to the election and it becomes clear who the candidates are, you might see some investors making decisions based upon that, which could cause short-term disruptions."

CORRECTION, FEB. 27, 5:40 P.M. ET: A previous version of this story misstated Walker & Dunlop Senior Vice President Sheri Thompson's role at the company. This story has been updated. 

Jason Hernandez, Sheri Thompson, Mike Cale and Jeanine Lester will discuss their outlooks on the market March 26 at Bisnow's DC Capital Markets & CRE Finance event, held at the Washington Marriott at Metro Center.