The Community Preservation Corporation (CPC), National Equity Fund (NEF) and Cinnaire have formed a joint partnership called CPC Mortgage Company, a new lender specializing in multifamily agency loans with the goal of both expanding and preserving affordable and workforce housing, Commercial Observer has learned.
Formed with the intention of making housing investments more socially responsible, CPC Mortgage Company gives multifamily owners and investors access to capital while also supporting its members’ nonprofit work to better their communities.
According to a press release, CPC Mortgage Company is the only nonprofit lender to offer Freddie Mac, Fannie Mae and Federal Housing Administration (FHA) products, including conventional, affordable and small balance loans for the acquisition, refinance, rehabilitation and development of multifamily properties.
“Our mission is to leverage the unique expertise of this partnership to bring flexible agency mortgage capital to communities to expand and preserve affordable and workforce housing,” John Cannon, president of CPC Mortgage Company, said in an announcement regarding the partnership. “We’re moving the mortgage industry towards a place where we can ask the question: Where do we need to be to make the biggest impact, and how can we use our unique skills and reach as nonprofits and affordable housing experts?”
As the new partnership launches, it will work with owners and investors of all sizes, with the goal of expanding and preserving affordable and workforce housing,
“At a time when we are facing a national housing availability and affordability crisis, we need to marshal our resources to expand and preserve housing in our communities,” said Rafael Cestero, CEO of The Community Preservation Corporation, in prepared remarks.
By reaching beyond the traditional agency customer base to owners of multifamily rental properties in underserved communities, CPC Mortgage Company aims to preserve the stability and affordability of rental housing in neighborhoods where it’s needed most, according to the release.
“Cinnaire is acutely aware of the challenges that many developers face in accessing capital in the affordable housing industry, and we are committed to expanding access to financing that supports multifamily development in areas that need it most,” said Mark McDaniel, president and CEO at Cinnaire, in prepared remarks. “It was a priority for us to partner with organizations with the same mission, and we are looking forward to joining CPC and NEF in providing developers expanded access to quality financial tools to build equitable communities.”
With an increasing number of borrowers and institutional investors focusing on environmental, social and corporate governance (ESG) principles, CPC Mortgage Company offers to put its mortgage dollars to work by supporting social equity in communities. The revenue generated through CPC Mortgage Company will be invested in housing and community development across the country.
“At National Equity Fund, everything we do is in service of our mission to deliver innovative, collaborative financial solutions to expand the creation and preservation of affordable housing,” said Matt Reilein, president and CEO of NEF, in prepared remarks. “Our joint partnership in CPC Mortgage Company presents a powerful opportunity to offer additional nonprofit, mission-driven capital solutions for developers to build and maintain safe, stable and affordable housing to help residents and communities to thrive for the long term.”
WTI, Inc has landed a $54.8 million refinancing for a multifamily property in Fort Myers, Fla., Commercial Observer has learned.
As a Freddie Mac seller-servicer, Newmark arranged the fixed-rate financing with a team led by Matthew Williams, James Maynard, Kyle Schlitt, Robert Wright and Alexis Ashley-Pierre.
Located at 15270 Ballast Point Drive, Channelside Apartments is a 325-unit, Class A multifamily property built in 2015. Community amenities include a pool, a fitness center, a spa and detached garages.
“We were pleased to have the opportunity to assist WTI, Inc. in refinancing Channelside Apartments with a 10-year, fixed-rate loan with interest-only payments,” Maynard said in prepared remarks. “The WTI team was able to capitalize on its keen real estate management skills to repatriate equity in connection with the refinancing, allowing the firm to continue executing its business plan.”
National multifamily returns continue to outpace inflation for the past quarter, according to Newmark Research. Total returns through the second quarter of 2022 averaged 24.4 percent on an annualized basis, a 450-basis-point increase from 2021. While inflation reached 9.1 percent, a level not seen in over 30 years, real returns for multifamily rose to 15.3 percent — significantly surpassing inflation. This has been the case over the past 40 years, except for the early 1990s recession and the Great Recession, according to Newmark.
Officials at WTI Capital did not immediately respond to a request for comment.
“CRED iQ tracked over $85 billion in multifamily originations for year-to-date 2022, including loans that were securitized in Fannie Mae, Ginnie Mae, Freddie Mac, and CMBS conduit transactions,” wrote Marc McDevitt, a senior managing director at CRED iQ.
“As a data, analytics and valuation partner to the commercial real estate community, CRED iQ helps CRE professionals uncover financing, leasing and investment opportunities. One of our many solutions is identifying the most active markets for loan originations. The highest volume of loan originations is typically in the multifamily sector for any commercial property type on a yearly basis.
“According to the Mortgage Bankers Association, multifamily originations were up 24 percent year over year in the second quarter and up 18 percent compared to the first quarter.
“Loans from Fannie Mae securitizations accounted for 41 percent of new originations by aggregate balance. CRED iQ included approximately $35.5 billion in Fannie Mae loan originations through August 2022 in observations.
“Through the first half of 2022, Fannie Mae issued approximately $34.7 billion in mortgage-backed securities, comprising nearly 1,900 loans. The Washington, D.C., and Phoenix markets have dominated Fannie Mae issuance so far in 2022 with approximately $1.7 billion in multifamily originations for each metropolitan statistical area (MSA).
“Freddie Mac securitizations accounted for 29 percent of 2022 year-to-date (YTD) multifamily originations within the subset. New multifamily originations that were securitized in CRE CLO (12 percent), Ginnie Mae (11 percent), conduit (4 percent) and single-asset single-borrower (3 percent) transactions made up the remainder.
“Loan origination activity this year has been heavily concentrated in primary markets, which accounted for approximately 56 percent of total multifamily originations through 2022 YTD. Loans secured by multifamily collateral in secondary markets made up 26 percent of new origination volume while loans secured by properties in tertiary markets made up 18 percent. Altogether, the 10 most active markets for 2022 multifamily originations accounted for 37 percent of total volume.
“In total, the New York-Northern New Jersey MSA was the most active market with $4.7 billion in originations, accounting for 5.5 percent of aggregate loan origination volume. The Dallas-Fort Worth MSA was the second most active market with $3.9 billion in multifamily originations, accounting for 4.6 percent of the total. Phoenix (4.3 percent), Houston (4 percent) and Washington, D.C., (3.7 percent) rounded out the five most active multifamily markets for loan originations in 2022.
“Notable secondary markets with the highest levels of origination activity included Columbus, Ohio (1.5 percent of total aggregate volume), Las Vegas (1.4 percent), Indianapolis (1.3 percent), Tampa (1.2 percent) and San Antonio (1.2 percent). Each of these secondary markets tallied over $1 billion in multifamily originations in 2022, between Fannie Mae, Ginnie Mae, Freddie Mac and private-label CMBS securitizations.
“Comparing YTD 2022 origination activity to 2021, we find some common markets as leaders in volume. For example, San Antonio led all secondary markets in origination volume during 2021 and ranks fifth through August 2022. Conversely, Oklahoma City had the second-highest volume of multifamily originations among secondary markets in 2021, but has failed to surpass the top 30 secondary markets so far in 2022.
“For those interested in building lending pipelines into tertiary markets, the Ogden, Utah, Dayton, Ohio, and Durham, N.C., markets were among the most active. CRED iQ tracked over $380 million in 2022 multifamily originations for each of these markets.”
A partnership between UrbanCore Development, E. Smith & Company, Oakland Economic Development Corporation and Red Stone Equity Partners has secured $153.6 million in tax-exempt and taxable construction loans for a new 387-unit affordable housing community in Elk Grove, Calif., Commercial Observer can first report.
Greystone affiliate America First Multifamily Investors (ATAX) provided the loan with a team led by Frank Bravo.
Located at the southeast corner of Bruceville and Poppy Ridge Roads, Poppy Grove Development in Sacramento Countyis an affordable apartment home community that sits on a 16.73-acre site. Upon completion, it will include 14 residential buildings, a business center, a clubhouse, an outdoor pool, an outdoor playground and a recreation area. The units will be restricted to residents earning between 30 percent and 80 percent of the area median income, according to a release.
“We are honored to leverage our expertise in affordable housing and work with partners who share our vision for addressing the affordable housing crisis in Sacramento,” Bravo said in prepared remarks.
At stabilization, and no later than 36 months from initial closing, the tax-exempt loan for the project will be partially paid down, and Greystone will provide up to $42.8 million in permanent Freddie Mac tax-exempt loan (TEL) financing in the form of a 15-year term, 40-year amortized facility.
“This project would not be possible without critical tax-exempt financing, which enables developers to create housing that addresses the demand for affordable housing in the Sacramento area and throughout the nation,” Ken Rogozinski, CEO of ATAX, in prepared remarks.
As a completed asset, the multifamily community will be owned by Poppy Grove I, Poppy Grove II and Poppy Grove III, each a California limited partnership.
“The Poppy Grove ownership is elated with the construction financing provided by ATAX,” Reese A. Jarrett, a co-managing member, said. “Our great relationship with Frank Bravo and the ATAX team was integral to completing the financing on this affordable housing development, which will enrich the lives of 387 families that will call Poppy Grove home.”
“CRED iQ prepared for the year ahead in commercial real estate by examining securitized commercial mortgages with maturity dates scheduled in 2023,” wrote Marc McDevitt, senior managing director at CRED iQ.
“CRED iQ’s database has roughly $162 billion in commercial mortgages that are scheduled to mature in 2023, including loans securitized in CMBS conduit trusts, single-borrower large-loan securitizations (SBLL) and CRE CLOs, as well as multifamily mortgages securitized through government-sponsored entities. The next year (2023) has the highest volume of schedule maturities for securities CRE loans over a 10-year period ending 2032.
“By securitization type, the SBLL securitization subset of nearly $100 billion comprises the majority (61 percent) of scheduled maturities in 2023; however, approximately 94 percent of that balance is tied to floating-rate loans that have extension options available, providing no assurances of refinancing or new origination opportunities.
“CMBS conduit loans account for the second-highest total of loans with 2023 maturity dates with roughly $29 billion in 2023 scheduled maturities, accounting for 18 percent of total scheduled maturities. This group of loans provides for diverse observation across property type, building class, and geographic location. Breaking down 2023 conduit maturities by property type, retail has the highest concentration with 42 percent of outstanding debt and is followed by office with 22 percent. Lodging has the third-highest concentration with 14 percent of the outstanding balance of scheduled maturities in 2023.
“From a monthly perspective, CMBS conduit loan maturities are dispersed fairly evenly throughout the year. May 2023 has the highest total of scheduled maturities out of any month with $3.9 billion. September 2023 has the second-highest total with $2.9 billion in scheduled maturities and is followed by January 2023, also with $2.9 billion. The January 2023 subtotal of maturities has potential to drop significantly over the next few weeks as refinances close ahead of the end of the year. Loans generally have three to four-month open periods, so lenders often have the opportunity to provide refinancing earlier than stated maturity dates.
“Roughly 12 percent of the 2023 scheduled maturity debt for CMBS conduits is already delinquent or in special servicing, foreshadowing potential maturity defaults, delayed payoffs, or extended workouts.
Multifamily
“The multifamily sector is the only property type represented across all various securitization structures in the 2023 maturity analysis, which includes Fannie Mae and Ginnie Mae mortgage debt. Aside from single-borrower large-loan multifamily loans with relatively higher probabilities of being extended, Freddie Mac securitizations accounted for the second-highest outstanding balance of scheduled maturities in 2023 with approximately $7.7 billion.
“Following close behind, there is about $7.5 billion in multifamily loans securitized in CRE CLOs that are scheduled to mature in 2023. Many multifamily loans securitized in CRE CLO vehicles are secured by transitional apartment properties moving up in building class through value-add initiatives. Although many of these loans have floating rates, the idea of locking in fixed-rate financing after completion of value adds may be an optimal completion of properties’ business plans.
“Fannie Mae multifamily loans also account for a considerable portion of 2023 maturities with $7.3 billion in outstanding debt coming due over the next year.
Retail
“Among CMBS conduit debt, retail is the property type with the highest volume of schedule maturities in 2023. There is over $12 billion in retail loans coming due in 2023, accounting for 42 percent of total scheduled 2023 maturities. Loans secured by retail properties have had the highest delinquency rates among all properties times for most of 2022.
“CRED iQ’s delinquency rate for retail was 7.06 percent as of October 2022 and has potential to rise throughout 2023 as maturity defaults occur in the process of sorting out payoff resolutions.
Office
“Perhaps one of the highest concerns from lenders is refinancing office loans. In the CMBS conduit environment, there is approximately $6.3 billion in loans secured by office properties scheduled to mature in 2023. This accounts for 22 percent of the total 2023 CMBS conduit maturities. CRED iQ’s special servicer rate for office loans has increased for three consecutive months from July 2022 through October 2022.
“Recessionary pressures, downsizing from tech firms and others, as well as the evolution of workplace dynamics from the fallout of the pandemic have all been encompassing forces that have had an adverse impact on office loan originations.
Looking Back and Looking Forward
“Aside from a focus on 2023 maturities, the year ahead brings plenty of opportunities within the CRE industry.
“Looking back —there is over $35 billion in outstanding debt with a past due scheduled maturity date that still needs to be worked out as well as several billion dollars in real estate-owned assets that are on track to be liquidated.
“Looking ahead to 2024 —CRED iQ’s early estimates indicated nearly $155 billion in scheduled maturities. However, the aggregate total is fluid when considering loan extensions and potential prepayments throughout 2023.”
Introduction: A Rapidly Developing Regulatory Environment
As financial regulators increasingly acknowledge that climate change presents systemic financial risk, there has been a proliferation of both mandatory and soft guidance on how to manage this risk.
While the U.S. has been slower to integrate climate risk into financial supervision compared to the European Union, many U.S. agencies have launched climate risk work streams over the past two years. Some of these developments relate directly to real estate assets, while many more have indirect implications through their impact on investors, lenders and publicly traded companies. This analysis reviews the landscape of climate risk regulation with a focus on developments in the U.S. that have implications for real estate stakeholders.
Key regulatory developments relating to managing the financial risks of climate change
New Requirements & Opportunities to Provide Input
In April 2022, the Department of Housing and Urban Development (HUD) released a New Environmental Assessment eGuide which outlined environmental assessment factors relating to climate change, including physical climate impacts, energy efficiency and environmental justice. HUD released a request for public comment (which closed in October) on how to develop its Green and Resilient Retrofit Program (GRRP), using the $1 billion allocated by the Inflation Reduction Act. HUD also announced that after Dec. 1, 2022, new development and substantial renovations of multifamily units requiring environmental assessments must include reasonable foreseeable climate impacts.
The EPA published a request for information on the Inflation Reduction Act provisions for Office of Air and Radiation Implementation in November. This includes input on how the EPA can support electrification and help to standardize corporate climate reporting. Responses are due Jan. 18, 2023.
Most U.S. Federal Agencies Are in the Planning Stage
Since the publication of the Financial Stability Oversight Council’s 2021 report stating that climate change is a financial risk and outlining recommendations for its member agencies to address the risk, the agencies have been working to implement these recommendations. The FSOC itself launched a Climate-Related Financial Risk Committee, which includes representatives from the 15 member agencies and began meeting in 2022. In October, it launched the Climate-Related Financial Risk Advisory Committee with experts from across industry and academia, which will begin meeting in 2023.
The Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) solicited input on their draft principles for climate-related financial risk management at large financial institutions and large banks, respectively. These principles provided high-level guidance on measuring and addressing physical and transition impacts across credit risk, liquidity risk, other financial risk, operational risk, legal/compliance risk and other nonfinancial risk.
Similarly, the Commodity Futures Trading Commission (CFTC) established a Climate Risk Unit in March 2021 and released a request for information on climate-related market risk in June 2022. This questionnaire covered topics such as data, scenario analysis and stress testing, risk management, disclosure, product innovation, voluntary carbon markets, digital assets, financially vulnerable communities, public private partnerships and capacity/coordination.
Given real estate’s prominence as an asset class in large financial portfolios, new data demands and reporting requirements are likely to trickle through the real estate value chai. Understanding how these plans are unfolding will help firms prepare preemptively.
Tangible Progress Made by Banking Regulators
The Basel Committee on Banking Supervision (BIS), the main global standard setter for prudential regulation of banks, published principles for effective management and supervision of climate risks in June 2022. The BIS will monitor the implementation of its 18 principles which cover corporate governance, internal controls, risk assessment, management and reporting, and is currently exploring a suite of potential measures to address climate risks in the global banking system.
In the U.S., the Federal Reserve announced that six banks (Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley and Wells Fargo) will participate in a pilot climate scenario analysis exercise. The Fed will publish details of the scenarios in early 2023 and will publish aggregate results likely at the end of next year. This exercise is exploratory with no capital consequences.
Continued Efforts to Establish Consistent Climate Risk Disclosure
Having reached its fifth anniversary, the Task Force on Climate-related Financial Risk Disclosure has evolved from an industry recommendation for voluntary climate risk disclosure, to a globally cited framework upon which voluntary and mandatory risk disclosure guidelines have been built.
In the U.S. there has been a large focus on the Securities and Exchange’s Commission’s proposed rule to mandate physical and transition risk disclosure for large publicly listed companies, in line with the TCFD. Initially the rule proposed that firms would start reporting as early as 2024 for reporting year 2023. However, the SEC is delayed in issuing the final rule. If passed, the rule will have implications for REITs as well as for the large companies facing new demands for transparency of their real estate assets’ emissions and exposure to physical climate hazards.
Many other jurisdictions have already mandated climate risk disclosure, and much of the soft guidance outlined above includes climate risk reporting. Figure 2 below shows progress made in TCFD-aligned disclosure by a subset of companies included in the 2022 TCFD status report, with progress slowing down after substantial growth in 2020. This highlights significant room for improvement.
Progress made in TCFD-aligned disclosure by 353 companies in the capital goods, chemicals, construction materials, metals and mining, and real estate management and development industries Source: Moody’s analysis, as seen in the Task Force on Climate-related Financial Disclosures 2022 Status Report
In October 2022, the G20 Sustainable Finance Working Group’s annual report recommended that jurisdictions and financial institutions disclose up-to-date transition plans ideally verified by third parties; transition progress at regular intervals; scope 1 and 2 emissions and scope 3 when possible; corporate governance related to transition plan implementation; methodologies used to assess transition progress and alignment; and use of proceeds or KPIs for transition finance or linked instruments.
Likewise, the International Sustainability Standards Board (ISSB), which is bringing together SASB, CDSB and other voluntary reporting initiatives to create one standard, global set of reporting requirements, voted unanimously to include scopes 1 through 3 in its reporting guidelines, as well as scenario analysis. The ISSB plans to issue final TCFD-aligned climate risk disclosure standards early in 2023, and CDP will integrate the guidelines into its reporting platform starting the 2024 reporting year.
The continued consolidation of clear reporting guidance means that the demand for climate risk disclosure is likely to continue to increase, with shareholders and regulators asking for specific information found in these standards.
Insurance Regulators Tackle Climate Risk
Insurance regulators’ actions on climate risk will have implications for real estate stakeholders and markets that rely on insurance.
The International Association of Insurance Supervisors (IAIS) joined the Network for Greening the Financial System (NGFS) as an observer in 2019; has integrated climate change into its strategic plan; added climate change to its annual insurance risk assessment; and will include it in 2022’s global Insurance Market report. It’s considering collecting climate data from individual insurers starting next year and will consult on new supporting material to help members understand and supervise climate risk. The IAIS also plans to integrate more explicit language into its supervisory standards to clarify that insurance supervisors must address climate risk.
The National Association of Insurance Commissioners (NAIC) approved an updated TCFD-aligned Climate Risk Disclosure Survey for insurance companies in April 2022. 15 states, representing almost 80 percent of the market, have committed to this new guidance.
The FIO released a request for public comment on a proposal to collect current and historical property and casualty underwriting data on homeowners’ insurance. Under the proposal the data would be aggregated by ZIP code and would help the FIO understand climate risk in the private insurance market, including availability and affordability implications. Responses are due by Dec. 20, 2022.
The investment giant has expanded its ever-growing footprint in Atlanta with the acquisition of Ellington Midtown, a 473-unit multifamily building in Midtown Atlanta, Commercial Observer can first report. The seller was Goldman Sachs Asset Management.
Blackstone paid $133 million for the property — a discount to replacement cost, sources said — and secured $65.8 million in Freddie Mac financing for the purchase.
“Located in one of the most dynamic submarkets in Atlanta, our purchase of Ellington Midtown illustrates our ability to deploy capital in our high-conviction investment themes even during volatile times,” Asim Hamid, senior managing director at Blackstone Real Estate, said in a statement.
The property is currently 94 percent occupied, but sources said Blackstone now plans to invest several million dollars into renovating its common areas, fitness center, swimming pools and the individual units.
Blackstone is no stranger to Atlanta, and the transaction is the latest of several in the city’s Midtown area. In May last year, the firm bought a majority stake in Anthem Technology Center, CoStar Group reported — the move being pegged as a sign of Blackstone’s conviction in Midtown’s tech corridor.
Its latest purchase at 401 17th St NW, blocks from the junction of Interstates 75 and 85,will benefit from the robust tailwinds behind Atlanta’s multifamily sector. The city is the No. 2 multifamily market for investment in 2023, according to Conti Capital’s Conti Index, with renters being drawn to its deep and diverse job market as well as the strength of the city’s educational establishments. (Dallas took the crown as the No. 1 market this time around.)
Ellington Midtown sits close to the Georgia Institute of Technology, better known as Georgia Tech— a big draw for new tech companies in the city seeking to pull from its deep talent pool. Last year, CNBC reported that top-tier companies such as Apple and Alphabet were opening offices in Atlanta hoping to tap into the tech talent available in the city, especially Black talent. CNBC, citing CBRE research, also noted that Georgia Tech produces the most tech graduates per year in the U.S.
Midtown is also home to other employer heavy hitters — including Microsoft, McKinsey & Company, Wells Fargo and Invesco — and the building is adjacent to Atlantic Station, a mixed-use development comprising office, retail and entertainment.
In January 2022, Blackstone announced it had acquired seven Atlanta housing communities via Blackstone Real Estate Income Trust’s (BREIT) $3.7 billion purchase of Philly-based Resource REIT. Five months later, BREIT announced it had also acquired Preferred Apartment Communities — a REIT focused on Class A multifamily and grocery-anchored retail assets — for $5.8 billion, underscoring its commitment to “high-quality multifamily in key Sun Belt markets.”
Goldman Sachs didn’t immediately return a request for comment.
A point of interest among multifamily investors reviewing February 2023 reporting data for CMBS securitizations was the special servicing transfer of a $270.3 million floating- rate mortgage secured by a 637-unit, 11-property multifamily portfolio owned by Blackstone.
CRED iQ anticipates the special servicing transfer to elevate the distressed rate for CMBS loans secured by multifamily properties within the New York City Metropolitan Statistical Area (MSA). Prior to February 2023, CRED iQ’s distressed rate for NYC Multifamily was 0.71 percent. The distressed rate is defined as the percentage of loans that are specially serviced, delinquent, or a combination of both.
Although the distressed rate for New York City multifamily appears nominal at first glance, the New York MSA still ranked as the sixth-highest for multifamily distress among the top 50 markets tracked by CRED iQ.
Other notable distressed properties in the New York MSA include 1209 Dekalb, a 127-unit mid-rise property in Brooklyn. The property secures a $46 million mortgage that has been specially serviced since October 2020.
Among multifamily markets with higher distress than New York were San Francisco (5.83 percent) and Los Angeles (1.24 percent). To be fair, the New York MSA is by far the largest multifamily market in the U.S and is expected to continue to attract multifamily investment given vacancy rates that trend below national levels and favorable demographics. These positives are balanced by headwinds such as negative net migration away from the metro and geographical resident deterrence stemming from remote working alternatives.
Reframing our view of distress to a historical perspective, the New York MSA has improved on an absolute basis compared to 12 months prior when the multifamily distressed rate for the market was 1.41 percent. However, the distressed rate appears to have reached its apex in October 2022 when the distressed rate declined as low as 0.51 percent. After October 2022, the New York MSA multifamily distressed rate increased for three consecutive months, without yet accounting for the latest $270.3 million addition to the distressed bucket.
Compared to the overall CMBS distressed rate for multifamily loans, historical trends for the New York MSA have exhibited similar patterns over the past year. The multifamily distressed rate for CMBS has been trending higher for six months.
The low-point for distress in CMBS multifamily loans over the past year occurred in July 2022 when the distressed rate was 1.41 percent. There were spikes in distress in August and November caused maturity defaults that were worked out by the next month. The multifamily distressed rate for CMBS has nearly doubled since July 2022.
Overall, the performance of the CMBS multifamily sector can be put into perspective when considering other property types and the broader multifamily market. Multifamily, along with industrial, have been the two best performing property types in recent history.
Other property types like retail, lodging and more recently office have faced secular headwinds due to shifting usage trends. For comparison, Fannie Mae’s multifamily delinquency rate — defined as loans that are 60-plus days delinquent — has consistently and steadily declined from its February 2022 mark of 0.40 percent. The Freddie Mac K-deal multifamily delinquency rate has barely registered with a delinquency rate — defined as loans that are 30-plus days delinquent — of just eight basis points as of year-end 2022.
CMBS multifamily collateral tends to have more idiosyncrasies than Fannie Mae and Freddie Mac collateral, partially explaining the variation in distressed rates. Additional idiosyncrasies and pockets of distress, such as the New York multifamily default, may materialize market by market as maturity balloon payments come due and floating-rate debt service continues to pressure coverage ratios.
Marc McDevitt is a senior managing director at data analytics firm CRED iQ.
Bldg Management has nabbed a $153.6 million debt package to refinance a residential tower in Jersey City, Commercial Observer can first report.
NewPoint Real Estate Capital supplied the seven-year Freddie Mac-backed loan for Bldg Management’s 451-unit The One property that it first developed in 2015. The property has a 10-year payments in lieu of taxes (PILOT) program.
Meridian Capital Group’s Carol Shelby and Eric Schleif arranged the transaction. The loan features a 35-year amortization schedule provided by Freddie Mac due to the deal having a 65 percent loan-to-value ratio along with an affordable housing component with 10 rent-restricted units, according to Meridian.
“Despite having to navigate complexities around a PILOT tax abatement program, this transaction proceeded smoothly along our targeted timeline for taking out a maturing loan,” Ryan Koehler, vice president, originations at NewPoint, said in a statement. “We rate-locked two weeks after application and closed on the same day as commitment.”
Located at 110 First Street near Jersey City’s waterfront, The One was more than 98 percent occupied at the time of the deal’s closing, according to Meridian. The property’s amenities include a rooftop deck with pool, attached parking, a concierge, a fitness center, a children’s playroom, a theater room, a golf simulator, a game room, a barbecue area and an outdoor dog park. The ground floor also features five retail spaces including a private school serving grades kindergarten through eighth grade.
“Having previously negotiated financing for this well-performing asset on behalf of Bldg Management, we were well versed in its history and are pleased to have partnered with NewPoint and Freddie Mac to deliver an attractive solution that supports Bldg Management’s business plan,” Shelby said in a statement.
Officials at Bldg Management did not immediately return requests for comment.
When the COVID-19 pandemic brought the commercial real estate lending markets to a brief standstill in the spring of 2020, Harbor Group International (HGI) saw an opening to scale its business into senior lending.
The Norfolk, Va.-based owner and operator that summer launched a lending platform that provides senior mortgage bridge loans on multifamily properties throughout the U.S. HGI then completed a $245 million equity raise for the whole loan platform in January 2021, and then closed its first CRE collateralized loan obligation (CLO) that May.
Richard Litton at Harbor Group International’s Norfolk, Va. office. PHOTO: Kieran Wagner/for Commercial Observer
On the sponsorship side of its business, HGI is better positioned than many other CRE owners given it’s weighted heavily toward the healthier multifamily sector and away from dicier office properties, which comprise only roughly 15.5 percent of its portfolio. The company was also very proactive in early 2022 as dislocation within the debt markets began to take hold. HGI sold off a number of its properties with floating-rate debt to raise its current percentage of fixed-rate assets to 71 percent, up from 60 percent early last year.
Richard Litton, president of HGI since 2005, spoke with Commercial Observer about how the choppy debt markets are impacting its CRE portfolio, the advantages of being a multifamily owner with executing its lending strategy, and the potential for more apartment acquisitions due to rising interest rate cap costs.
The interview has been edited for length and clarity.
Commercial Observer: Where were you raised and what were some of your interests growing up?
Richard Litton: I was born in Charleston, S.C., but from third grade on I was raised in southwestern Virginia, in a very, very small rural town called Buchanan. In terms of sports, I played baseball all the way through high school as that was my favorite sport. I have always been a big reader of American history, so any and all things American history has always been an interest for me — and, as a Virginian, there’s plenty of that.
Prior to arriving at HGI in 2004 you were a corporate attorney at one of Virginia’s largest law firms, Kaufman & Canoles. What prompted this transition into commercial real estate?
Several years before I joined Harbor Group, I was hired by Harbor Group Chairman and CEO Jordan Slone as Harbor Group’s outside corporate lawyer. So I had an opportunity to work closely with Harbor Group for several years in that capacity with Jordan and with other partners at Harbor Group. And a lot of that work I did related to partnerships and other corporate work as the firm was starting to attract larger and more institutional investors. So, really, from day one in that role I thought so much of the individuals and the plans for the company to grow and how it wanted to grow.
It became a fairly natural and not uncommon transition to go from an outside corporate lawyer at a firm to an in-house role. So I joined in May of 2004 as a general counsel, but also with a very specific goal of being more and more involved in the business as opposed to a purely legal role. I became president in May of 2005, and I’ve been in that role ever since.
How does your legal background benefit you in the president’s role?
For one, my work as an outside corporate lawyer was always very transaction-oriented, with mergers and acquisition work, securities and corporate work related to companies raising capital, buying and selling businesses. Everything Harbor Group does as a private equity firm has some components related to what I used to do as an outside legal counsel.
Like any private equity firm, we’re very transaction oriented and we raise outside capital, so a lot of those experiences and skill sets as an outside lawyer were fairly easily transferable into what we do in our group. You learn a lot about structuring and tax and negotiating strategies and negotiating styles and all the other things that are involved in getting a transaction to the finish line.
In 2020 during the height of the pandemic you launched a lending platform that provides senior mortgage bridge loans on multifamily properties throughout the U.S. What spurred this?
The first step was to start doing multifamily credit investments of some different types. In 2007, we started doing preferred equity and mezzanine loans. In 2015, we started acquiring Freddie Mac B pieces. So, by 2020, we already had a quite robust multifamily credit business and different strategies, but we had not originated our own senior mortgages. We had talked about it for years, but it was a crowded space, a crowded field, and the question was when would be the right time to launch that business.
With COVID, we went through a period of time — a relatively short period of time, but a period of time nonetheless — where there really was a lack of liquidity in the market. We felt like that was the time we could enter the sector and achieve some outsized returns. We were very fortunate to raise some meaningful capital around the strategy during the depths of COVID and then launch the business in late summer of 2020 and start closing loans by August. It was a natural progression of our multifamily credit line of business, but it was a matter of finding the right time in the cycle to actually enter the market as a senior lender.
How has being a longtime multifamily owner and operator aided your lending business?
It’s been very powerful for us to also be an owner in a couple of different ways. One is with our multifamily investment professionals; we don’t break them down between debt officers. We have multifamily specialists and they cover different geographic regions, so the same transaction officer that might source an apartment property to buy in Phoenix is going to be the same person who’s covering that market to make senior loans or preferred equity fundings or mezzanine loans. By having professionals dedicated to regions, you really are able to develop very deep relationships that get you lots of different types of opportunities, so I think it’s been very impactful from a deal flow perspective.
Also, we have so much in-house data from our owned real estate. If we are looking at a whole loan in Atlanta and the properties in a particular submarket and there’s a particular business plan to renovate the property and achieve certain rent growth, we have tremendous in-house data already based on real estate we own, or it could be loans within our Freddie Mac B-piece pools. We have real-time information on what’s going on in a particular market, and I think it helps us really do a good job of assessing the business plans of sponsors that we’re considering lending to.
What has lending volume been like in the last year since the dislocation of the debt markets began to take hold amid rising interest rates?
In the last year it has been steadily declining. We were still certainly active this time a year ago, which would have been weeks after Russia’s invasion of Ukraine. We were starting to see some choppiness but there was still transaction activity so we were fairly active. But it’s been a steadily declining opportunity set for our whole loan business, and we’ve frankly done very, very little of it in the first quarter of this year. That’s a product of dramatically reduced transaction volume. That business obviously depends on sales to occur and refinancings to occur.
Also, our product is only floating-rate and given the [Secured Overnight Financing Rate] index combined with the spread we need to charge on our loans, it’s frankly very expensive debt. Borrowers are far more interested in the current cycle acquiring fixed-rate financing as opposed to floating-rate.
In May 2021, you launched HGI’s first CLO composed of bridge loans on multifamily assets across the U.S. How has demand for this platform held up with the market fluctuations in the last two years?
That’s an execution strategy for the same sort of loan business. That initial CLO was a pool of loans that we originated once we started the business. And, you know, at that time throughout 2021 and into 2022, the CLO market was robust and active. We’ve done a total of three CLOs. We’ve done a Freddie Mac Q transaction, which is another form of a CLO execution facilitated by Freddie Mac. But, really, that market, which depends on bond buyers, has been very shallow in recent periods. Since that Freddie Q transaction it has not made sense to access the securitization markets, and we’ve just kept the few loans that we do have on our balance sheet.
Turning to the sponsorship side of your business, you were proactive in early 2022 anticipating a rising interest rate environment by selling off a number of properties with floating-rate debt. How has this move affected your portfolio’s performance?
We saw the market starting to move, particularly with interest rates, towards the end of the first quarter of 2022. We decided to sell a lot of multifamily while the pricing environment was still strong, and we focused in particular on selling assets that were financed with floating-rate debt. We made a very conscious effort to end that period of dispositions with a bigger percentage of our portfolio subjected to fixed-rate debt and we were very successful doing that. By the time we had completed our target dispositions in late summer of 2022, over 70 percent of our owned portfolio was financed with fixed-rate debt.
And, ever since then and including the first quarter of this year, where we’ve had opportunities to sell at pricing that made sense or had opportunities to refinance out of floating-rate debt into fixed-rate debt, we’ve really worked hard to take advantage of that. So we continue to orient with every opportunity we can to take floating-rate debt off the books on our own portfolio and either sell or be in a fixed-rate financing structure.
What geographic markets are you most focused on now?
We certainly have been focused and continue to focus on the Sun Belt growth markets. We’ve made very significant investments in Florida over the last year, including in particular South Florida, given the strong in-migration trends and job-driver trends. We certainly still very much like the large Texas markets. We had been through a period of time where we did not buy in Phoenix because we thought pricing had gotten overly robust, but once pricing got better, as a buyer, we acquired again in Phoenix several assets in the last part of 2022.
So, mid-Atlantic, Southeast, Southwest have been principally where we focused, but we are very sort of granular in terms of looking at opportunities, and there are other markets where we’ve acquired and done very well. Columbus, Ohio, for example, has been a terrific market for us and has a lot of good dynamics as an apartment market for investors.
We do expect that owners with floating-rate debt, and in particular floating-rate debt that’s going to require a replacement of interest rate caps, to see some real pressure, particularly in the second half of the year. The cost of debt servicing has obviously increased dramatically for any owner with floating-rate debt, and then the cost to replace the interest rate caps that are expiring is for many owners prohibitively expensive.
If you think about all the robust transaction activity in the fall of 2020 and fall 2021, if you were buying a three-year cap in the fall of 2020 or a two-year cap in the fall of ’21, those are all expiring this fall, and we think that that will be a real trigger for increased transaction activity. We think it’s something that lenders are closely watching as well as borrowers themselves, and we just think it’s going to be a catalyst for much more robust capital markets activity in the last part of the year.
Obviously it’s very fluid, but how do you expect the banking crisis after the failures of Silicon Valley Bank and Signature Bank to affect HGI’s business?
Obviously, some of the regional banks — not necessarily Silicon Valley Bank, but certainly Signature Bank and some other regional banks that have been under pressure — have been active lenders in commercial real estate. So, to the extent that that capital is not available, that could certainly have an impact on available debt liquidity.
We were already in a situation where the very large money-center banks were being very cautious on new lending, so there are some stresses in the market in terms of available debt capital. Multifamily has the very important benefit obviously of Freddie Mac and Fannie Mae as they remain very active. They’re active for us in terms of anything we’re looking to refinance into fixed-rate debt. We’ve got a good pipeline with Freddie Mac in particular to refinance into fixed-rate debt and, then, to the extent they have increasing volumes, that certainly benefits us as a B-piece buyer as well.
The office sector is another class that represents roughly 15.5 percent of our assets under management. That’s a different situation. Obviously, that sector does not benefit from Freddie Mac and Fannie Mae, and there is a real absolute lack of any meaningful debt in the office sector. So that’s a real stress point for the office sector.
It certainly benefits you to be more weighted toward multifamily, which experienced healthy growth during the first two years of the pandemic. It has shown some signs of cooling down of late from a very hot period. How do you see the sector shaping up for the rest of this year and beyond?
Certainly, the very, very significant rent increases in some markets, pushing up 20 to 25 and even 30 percent, that wasn’t sustainable, nor did we ever invest or underwrite or project that would continue, so it’s not surprising that rent growth has leveled off.
That said, we’re still seeing rent growth in our portfolio on renewals and on new leases or trade-out rents at a much more moderate level but healthy nonetheless. We still have the backdrop of an insufficient housing supply in the United States, and, particularly with construction costs and then an inflationary environment, that only puts more pressure on supply. So overall supply and demand metrics still feel very good as an apartment investor, and we expect that to continue in the United States for the foreseeable future.
Slavery, Jim Crow, redlining and the New Deal have concentrated Black Americans in undervalued occupations and neighborhoods, producing and perpetuating persistent and structural gaps in every aspect of economic well-being. While programs such as the Great Society’s War on Poverty sought to resolve these disparities, most have failed to create the educational, housing and job opportunities that could help Black Americans climb the socioeconomic ladder and create generational wealth.
But things are changing. Black churches nationwide are working to break this injurious pattern by spearheading real estate developments in their own backyards that can do this — and more. In truth, these institutions have played a significant and effective role in the lives of Black people living in the U.S., and community development, for more than two centuries.
As someone who has invested billions in real estate over my decades-long career, and as the son and grandson of Black Episcopal pastors who focused on improving their congregants’ economic and spiritual well-being, I can attest to the positive influence that thoughtful and inclusive real estate investment can have on communities. From 2008 to 2021, I led the renovation and operations of Baldwin Hills Crenshaw Plaza in historically Black South Los Angeles for an investment fund. This vibrant and thriving anchor has been a point of community pride for 76 years.
Quintin E. Primo III. Eric Herzog
Yet as beneficial as real estate developments can be to communities, shepherding ventures from concept to completion can be difficult. My experiences confirm that for would-be Black entrepreneurs, who have historically lacked opportunities to gain real estate development experience and access to capital, the challenges can seem insurmountable.
While lawmakers have enacted programs to remove obstacles and fuel economic activity in Black neighborhoods, most have failed to deliver. For example, the Community Reinvestment Act of 1977 (CRA) has barely achieved its core goal to increase bank lending in low-income communities. A study by the Federal Reserve Board and others found “CRA’s effect on loan volumes and profitability appeared to be small.”
For these and other reasons, Black churches nationwide have been taking control of economic development with real estate projects in their undercapitalized neighborhoods, even though many of their now-affluent congregants live elsewhere but choose social identity over spatial proximity. Many of these faith-based development initiatives have focused on creating affordable housing, as evidenced by initiatives in Seattle, Oakland, Washington, D.C., and Baltimore. While these are effective and admirable projects, many now realize that a key to building and maintaining healthy, viable communities is to attract residents across the socioeconomic spectrum.
How can churches make this happen? By including assets that foster commerce and economic diversity in their developments. In turn, these assets increase property values, encourage home ownership and build generational wealth within communities.
The Apostolic Church of God is taking this approach in Woodlawn, a severely undercapitalized neighborhood on Chicago’s South Side. Despite Woodlawn’s many valuable amenities — such as Jackson and Washington parks, the University of Chicago, good elementary and high schools, thriving retail establishments and excellent access to transit — developers have been reluctant to invest there.
In 2015, the Apostolic Church of God took matters into its own hands and convened Woodlawn residents, leaders and stakeholders to craft a development plan based on extensive community engagement. Today, Woodlawn Central, an ambitious planned development, leverages the community’s existing assets to build a transit-oriented nucleus of not just affordable housing but also workforce, market-rate, senior and luxury units as well as offices, retail, cultural spaces, hospitality and vanguard infrastructure like a microgrid and urban farming facility. The church purposefully designed Woodlawn Central to energize and support Black businesses, creators, innovators and residents.
While my firm has no involvement in this project, we applaud their team’s vision and commitment to transformative change through equitable and sustainable economic development. Given the nation’s dire need for housing and lack of available inventory for middle-income renters, housing analysts believe workforce housing is a stable, remunerative and critical investment today. Freddie Mac and Fannie Mae also have very supportive loan options for these types of properties.
As transformative as Woodlawn Central promises to be, however, we must recognize that creating equity takes more than a one-off development or frequenting Black-owned businesses. It also means helping other underserved communities build inclusive and diverse developments, working with Black investment professionals, investing in Black-owned startups, stocks or exchange-traded funds and more. Committing capital to Black communities in these ways can make direct and constructive contributions to vanguard economic development efforts and help eliminate racial economic disparity, right historic wrongs and democratize opportunity.
Quintin E. Primo III is the founder and executive chairman of Capri Investment Group.
Freddie Mac has put Meridian Capital Group under the microscope after a loan brokered on behalf of the government-sponsored entity was called into question.
Meridian has been barred from placing deals through lenders that are Freddie Mac seller-servicers while the investigation is underway, and the Ralph Herzka-owned firm has placed one broker on leave while it cooperates with the probe, The Real Deal first reported.
A source familiar with the suspension said that Freddie Mac raised questions about certain loan information in originations tied to the broker in question. Freddie Mac notified seller-servicers that it would be suspending certain business involving Meridian late last week as a full investigation was launched.
Full details of the investigation were not immediately clear, but as one of the biggest commercial mortgage brokerages in the United States with a robust portfolio of agency multifamily originations, there could be far-reaching impacts for the industry. After all, in 2022, Meridian took the crown for the most Freddie Mac and Fannie Mae originations through lenders for the seventh year running.
One source opined that, depending on the findings, buybacks could occur if it’s found that Freddie Mac loans were originated outside of the agency’s underwriting standards.
Another source, speaking more generally, said that tweaking or manipulating loan information in order to conform to underwriting criteria — agency or otherwise — often goes unnoticed in good markets, but comes to the fore at times of dislocation. They added that any sign of bad information in originations could spark a full investigation of a firm.
“Meridian is committed to compliance with industry standards and best practices,” a spokesperson for Meridian said in a statement. “We value the long-standing, trusted relationships we have built with our customers, agency lenders and other partners, and continue to work with our clients to meet their real-estate brokerage needs.”
Freddie Mac did not immediately respond to a request for comment.
The new hire came on the heels of an announcement in April that Meridian would be laying off 5 percent of its staff due to economic conditions, mostly from the debt and investment sales team and its head of public relations at the time.
Those of us in the media who have followed WeWork over its highs and lows have known for months that the end was nigh.
The end (or bankruptcy, to be more specific) turned out to be last Monday night when the coworking giant — once the largest private tenant in New York and a number of other cities around the globe, with a valuation of $47 billion — filed for Chapter 11. This was hours after WeWork trading on the stock exchange had been suspended.
Weeks earlier, Commercial Observer had set to wondering what a pending WeWork bankruptcy would do to New York’s already struggling office owners, and the answer wasn’t pretty. Landlords who counted WeWork among their biggest tenants owe some $2.6 billion in debt related to commercial mortgage-backed securities, about half of which is due to mature in the next year. Four out of five of these landlords are delinquent with their loans, in default, or on special service watchlists.
“In the case of landlords, there are going to be a lot of heads that go through the windshield as that business comes to a screeching stop,” Anthony Malkin, the CEO of Empire State Realty Trust, put it bluntly.
Immediately after the bankruptcy, WeWork put out a list of 40 “underperforming locations” in New York, plus another 29 in the rest of the country and Canada, that it intends to close. (These leases alone are tied to $1.85 billion in CMBS debt, as per KBRA Analytics.) And it revealed that it owes $98.6 million in back rent to various landlords.
It is, not to put too fine a point on it, an unholy mess.
Of course, the very biggest loser in all this was Japan-based SoftBank Group which has lost $14.3 billion on WeWork.
“As a company, we need to accept this reality and also need to learn the lesson from this for our future investment activity,” a resigned Yoshimitsu Goto, SoftBank’s Chief Financial Officer, said during an earnings call.
But you know who didn’t lose? WeWork co-founder Adam Neumann.
Neumann took a personal loan of $430 million from SoftBank and used his WeWork shares as collateral. Now that the shares have lost almost all of their value, he could conceivably walk away, leaving his former benefactors holding the bag.
Meridian meltdown
On just about any other week, the major story would have been the fact that Meridian Capital Group got slapped hard (in ways that we don’t yet fully know) by Freddie Mac, which suspended the brokerage from doing any business with its lenders — and also announced an investigation was underway.
While it’s still very murky what transpired, one source told CO that Freddie, a government-sponsored entity, began inquiring whether loan information provided by a Meridian broker during underwriting was false or manipulated.
Hot on the heels of this, Freddie’s GSE rival, Fannie Mae, announced that it was subjecting all agency-backed loans that included a broker to pre-review.
By Thursday, Freddie said it wastightening its underwriting requirements and essentially bypassing brokers by demanding that all loan documentation be provided by borrowers directly to lenders.
This cannot be good news for Meridian. Back in 2022, it did more business with Fannie and Freddie than any other brokerage, originating some 4,266 loans. But it is a story that has not come close to being fully played out yet, so CO is going to be keeping a close eye on it.
And now for something completely different
With all the drama going on and the big, big hole that a defunct WeWork will open up in New York (as well as other urban markets), there were actually some hefty leases signed last week.
At Rudin’s 1675 Broadway, the law firm Davis & Gilbert added an extra 12,022 square feet to its existing footprint, raising its total at the Midtown office building to 98,125 square feet.
Davis & Gilbert weren’t the only ones in expansion mode. Energy Capital Partners, an energy investment firm, took 15,400 square feet at 1 World Trade Center, more than doubling its existing presence in the building and bringing its total to 26,292 square feet.
And while it wasn’t office, the South Bronx Overall Economic Development Corporation renewed its monster 137,605-square-foot lease at 131 Walnut Avenue in the Bronx.
Things that could have led Sunday Summary on a normal week
Yes, if not for WeWork and Meridian doings, there was plenty in the news that we normally would have been happy to highlight.
First up, Mets owner Steve Cohen (who still valiantly chucks his money away on a team that will disappoint anyone who ever loved it) announced that he would be partnering with Hard Rock International, Field Operations and SHoP Architects to build an $8 billion casino, park, live music venue and food hall called Metropolitan Parkin his bid for a casino license in Queens. (Only three available licenses will be granted to downstate operators, and Cohen and others are vying hard to win one.)
Another bit of news that would have normally astounded us was that a CMBS loan on one of New York’s great icons, the Helmsley Building, has gone into special servicing.
The two-year floating-rate loan expires Dec. 8 and the building’s largest tenant, RELX, Inc., declined to renew its lease in October, according to a report by the Kroll Bond Rating Agency.
“We’re in discussions with lenders about restructuring the loan,” David Garten, senior adviser at RXR which sponsored the loan, told CO.
Another story which finally came to a conclusion after months (actually, make that years) of uncertainty was the fate of the new FBI HQ. (No spoilers in this particular newsletter. But if you want some background on this, check out this story CO wrote back in March.)
Oh, and did we mention that CO sat down for a one-on-one with David Martin, one of the most prolific (and most luxurious) developers in South Florida? Well, read on!
Sunday reading
While all this was unfolding, CO had spent the last couple of months assembling our yearly Owners Magazine, which published on Tuesday,
This involved tapping some of the top owners and developers in the city, including Douglas Durst, Tony Malkin, Ben Brown and more, where we asked them their take on the market.
Specifically, we asked them for their big-picture plan. What’s their company going to be working on in the next couple of years? How about the next five years? What about the next 10?
The answers were interesting. (The big-picture stuff we compiled here, but it never hurts to go directly to the source and leaf through what all the owners had to say individually.)
The issue also includes stories affecting ownership, like the worrying level of turnover in commercial real estate; the biggest real estate prize in 2023, i.e., data centers; and the new entrants to the market.
But our favorite question that we posed to owners was who they were most like from the HBO mega-hit “Succession.” (Any answer was acceptable, except for Tom Wambsgans.)
Now, if you’ll excuse us, we need to rest up for the coming week.
Vista Property Group secured $47.75 million in acquisition financing to close on a $76 million sale with The John Buck Company to purchase 3Eleven, a 245-unit, high-rise multifamily complex in the River North neighborhood of downtown Chicago.
Freddie Mac Multifamily, a subsidiary of the Federal Home Loan Mortgage Corporation, provided financing on the acquisition. JLL Capital Markets arranged the financing on behalf of Vista Property Group.
Hymie Mishan, co-founder and principal at Vista Property, said in a statement that his firm is a “big believer” in the Chicago multifamily market, largely due to its strong demand and continued rent growth through the pandemic dislocation.
“We are very pleased to add the well-maintained and well-located 3Eleven to our growing portfolio of multifamily investments in Chicago,” he said. “We are excited to welcome 3Eleven’s residents into our portfolio and provide them with the exceptional service and amenities they deserve.”
Located at 311 West Illinois Street, in the bustling River North District in downtown Chicago, 3Eleven opened in 2018. The 25-story apartment complex features one-, two- and three-bedroom units encased by floor-to-ceiling windows, while the building itself boasts an outdoor theater on a rooftop terrace, an outdoor pool, a fitness center, a yoga studio, a yoga lounge, and a meditation space.
But the neighborhood itself appears to have been the catalyst that attracted Vista Property Group to the transaction. Steps from the Chicago River, a few blocks from the Merchandise Mart CTA Train Station, near numerous hotels and within the famed River North restaurant row that includes Lou Malnati’s Pizzeria, Bavette’s Bar & Boeuf and Chicago Cut Steakhouse, 3Eleven is situated in a part of town that has weathered the worst of the recent commercial real estate downturn.
“3Eleven’s central location within the River North neighborhood offers a quality of life that is hard to top,” said Mishan. “Within a few blocks, residents can access the Chicago River, the East Bank Club, the Loop, premier shopping destinations, and world class restaurants.”
Fannie Mae and Freddie Mac have originated more than half of the $1.1 trillion in outstanding multifamily loans set to mature within the next decade, and a stunning $300 billion in agency debt comes due in the next five years alone, according to a new report from Yardi Matrix.
Moreover, the largest number of properties secured by those same loans are within five metropolitan areas: Atlanta, Dallas, Denver, Houston and Chicago. All told, there are currently 58,333 multifamily properties nationally carrying an outstanding balance of $1.1 trillion.
“The gateway cities have the largest demand,” said Doug Ressler, manager of business intelligence for Yardi Matrix. “The developers are looking at it longer term — three-to-five-to-10 years — and they’re asking, ‘Do I have the ability with a long runway to garner revenues with increasing expenses? Do I have the demand that I can bring people into my apartments to be able to get that revenue I need over the long term?’
“Larger cities have more propensity for density,” he added.
Due to changing work habits, easy money and a shrinking supply of single-family housing, demand for the asset class has surged over the last half decade, and lenders have eagerly financed a wave of borrowing. But now higher interest rates, flattening rents and lower values are testing the health of many of those loans.
No type of lender has more multifamily loans than government-sponsored entities (GSE) Fannie Mae and Freddie Mac. GSEs currently have 30,505 outstanding loans carrying a total of $641.8 billion, roughly 56 percent of the entire loan total.
“It’s a little higher than it has been in the past, but joint ventures are willing to work with them because the banks don’t want this stuff back,” said Ressler. “One of the things you have to look at is what the terms and conditions are with the loan: Can I extend-and-pretend with Fannie and Freddie as easily as I can with others?”
Commercial banks carry roughly 9,400 loans, an outstanding loan amount of $187 billion (16.4 percent), while debt funds carry 2,550 loans with a value of $69 billion (6.2 percent) and life companies carry 2,700 loans with a value of $67 billion (5.9 percent).
Commercial mortgage-backed securities hold a relatively modest place in the multifamily loan space: only 1,099 CMBS loans outstanding hold an amount of $25.7 billion (2.2 percent).
Lenders originated 40 percent of outstanding multifamily in the low interest rate era of 2021 ($194.7 billion) and early 2022 ($209.8 billion) — prior to the 500 basis point increase in rates engineered by Federal Reserve Chairman Jerome Powell between March 2022 and September 2023.
“Origination volume dropped by 45 percent to $115.3 billion in 2023, as high rates and tepid rent growth stalled transactions and refinancings,” according to the report. “Many loans that were scheduled to mature in 2023 were extended by lenders, as loans were underwater due to greater debt service costs under the higher interest rate environment.”
The timeline for the loan maturities is spread so that nearly three-fourths of them will mature between 2027 and 2029. Approximately $61.8 billion worth of multifamily loans are set to mature this year (5 percent of the outstanding total), with another $84.3 billion maturing in 2025 (13 percent of the outstanding total). The post-2029 loan landscape exceeds $613 billion in maturities, reflective of the typical 10-year term given on most CRE loans. .
Of the $1.1 trillion outstanding multifamily loans, 85 percent carry fixed rates, while 15 percent carry variable rates.
“It’s better than an adjustable-rate mortgage, that’s for sure,” quipped Ressler.
Over the next two years, as more than $111 billion in multifamily loans mature, several U.S. metro areas will take the brunt of facing the risk of those loans coming due in a higher interest rate environment. Between 2024 and 2025, roughly $12 billion in multifamily loans will mature within the Atlanta metropolitan area, $8 billion will mature in Dallas, $7 billion will mature in Denver, roughly $6 billion in Houston, and $5.5 billion in Chicago. Those five cities plus New York also face the highest amount of multifamily loans maturing between 2024 and 2027.
The Yardi Matrix report emphasized that loan defaults are property specific, and market-level data remains an uncertain predictor of delinquency rates either now or in the future. Rather than maturity timetables, the real risk is a large amount of supply depressing rent growth just as the maturities take effect in some of these larger cities.
“Most high-supply markets also have strong apartment demand,” according to the report. “However, large numbers of deliveries extend the time it takes to lease up new properties and increase concessions throughout the market, which has the potential to add stress to some properties.”
There’s also the securitization element to the equation.
A record $45 billion of collateralized loan obligations (CLO) were issued in 2021, of which $28 billion were backed by multifamily properties, according to data from Commercial Mortgage Alert. The Yardi Matrix Report cited from Morningstar DBRS showed the rate of CLO loans that are more than 30 days delinquent from 285 basis points to 6.2 percent by the end of 2023.
But Ressler isn’t concerned by the slight uptick.
“It’s an alternative that people are looking at right now and it’s really good from the standpoint that CLOs, C-PACE, they give you some alternative financing,” he said. “The CLO market is not a concern.”
Montgomery Housing Partnership (MHP) has secured a $26.2 million Freddie Mac loan for its age-restricted housing community, dubbed Franklin Apartments, just north of Washington, D.C., according to JBG Smith.
KeyBank provided the Freddie Mac loan, concurrently with an extension of a $3.75 million soft loan from Montgomery County toward the property. At the same time, the property also secured $6 million in mezzanine financing from the Washington Housing Initiative Impact Pool, an affordable housing investment platform managed by JBG Smith.
Representatives for KeyBank did not immediately respond to a request for comment.
Located at 7620 Maple Avenue in Takoma Park, Md., Franklin Apartments is a Class B mid-rise building that features 185 units.
The Impact Pool financing is part of JBG Smith’s effort to create and preserve 3,000 affordable housing units in the D.C. area by 2025. The mezzanine loan for Franklin Park pushes the Impact Pool across the finish line a year early, with still more funds available to invest in additional units, according to JBG Smith.
Other communities that comprise the more than 3,000-unit total are in Alexandria, Va.; Arlington, Va.; Hyattsville, Md.; Wheaton, Md.; Silver Spring, Md., and in the District itself.
“The Franklin Apartments investment is a perfect example of what we sought to accomplish when we created the Impact Pool,” AJ Jackson, executive vice president of social impact investing at JBG SMITH, said in a statement. “Montgomery County is projected to lose up to 11,000 naturally occurring affordable housing units by 2030. Our collaboration with a nonprofit owner, dedicated to the property’s preservation, will provide residents with the ability to age in place in a resource-rich neighborhood of Montgomery County.”
MHP, a 501(c)(3) nonprofit affordable housing provider, acquired Franklin Apartments in 2022 for $37.2 million, according to property records. The community was built in 1952 and renovated in 2011.
Bozzuto Group has dipped back into the multifamily pool, with mortgage broker Berkadia providing the floaties.
Bozzuto last week purchased the Gables 12 Twenty One multifamily complex, in Rosslyn, Va., from previous owners Gables Residential for $44.5 million, according to property records. It is the firm’s first multifamily purchase in 16 years, The Washington Business Journalreported.
For the purchase, Berkadia’s Patrick McGlohn, Brian Gould, Miles Drinkwalter and Pat Cunningham provided $27.3 million of Freddie Mac acquisition financing on behalf of Bozzuto.
“This was a dynamic and competitive financing process that attracted numerous financing options given the strength of the asset, location and sponsor,” McGlohn said in a statement. “Our partners at Freddie Mac exhibited nimbleness and were able to quickly lock the interest rate, which proved to be extremely valuable given the current Treasury volatility.”
Located between 1200 North Queen Street and 1201 and 1225 North Pierce Street, the 132-unit complex has recently been redubbed as The Alcott.
Built in 2009, the Alcott has an average unit size of 813 square feet and was 96 percent leased at the time of the sale, according to Berkadia’s marketing materials for the property.
“Under current market conditions, new construction of apartment buildings is extremely costly,” Bozzuto CEO Toby Bozzuto told Commercial Observer via email. “Apartment developers across the country are challenged by an inflationary market, which drives up the costs of capital and construction costs. As such, it is currently more advantageous to purchase an existing community, particularly one like The Alcott, which is located in a desirable location with prime amenities.”
Gables Residential did not immediately respond to a request for comment.
Bozzuto has its hands full on the Maryland side of the Washington, D.C., region. In a joint venture with the Chevy Chase Land Company, the firm has spent the last few years developing the 6-acre, mixed-use Chevy Chase Lake, which these days features three luxury apartment buildings — The Barrett, The Claude and The Ritz-Carlton Residences, Chevy Chase — along with 100,000 square feet of retail space. Fitness studio StretchLab and Dok Khao Thai Eatery signed leases there in September.
Meridian Capital President Yoni Goodman will be leaving the firm in the aftermath of an investigation into its loan originations, The Real Deal reported Wednesday.
Goodman told TRD he will depart from the company later this week “for other opportunities” after working for a decade at the firm founded by Ralph Herzka.
“We achieved a lot of great things over these 10 years, but people don’t stay at companies forever,” Goodman said to TRD.
A spokesperson for Meridian did not immediately respond to a request for comment.
Goodman worked as an investment banker at Goldman Sachs until 2014 when he joined Meridian, where he helped the company expand into retail leasing and investment sales.
The firm took another hit in January when one of the brokerage’s closest multifamily lenders, New York Community Bank, nearly collapsed after CEO switches and plummeting stock prices.
Goodman’s solution to the problems was to discover new lenders and tailor Meridian’s deals around data and analytics, and he managed to steer Meridian across the finish line to end 2023 with $24.1 billion in originations on more than 1,500 loans in 43 states, Commercial Observer previously reported.
Meridian also brokered an additional $1.5 billion in investment sales transactions and deals that exceeded 2.8 million square feet of commercial property in 2023.
Goodman isn’t the only Meridian member to head for the door in the wake of the investigation. In April, debt brokers Adam Hakim and James Muradleft the firm after six years to join Ripco Real Estate.
