Friday, July 11, 2008

Uncertainty for Multifamily on the Way?

During the current commercial real estate downturn for-rent multifamily has consistently been considered the best bet among the four major flavors of commercial real estate. Multifamily investors expect improving fundamentals thanks to foreclosure-displaced homeowners becoming renters and would-be buyers continuing to rent while waiting for a turn-around.

Beyond these fundamentals, the biggest driver of the multifamily market's relative strength has been the continued availability of inexpensive debt from Fannie Mae and Freddie Mac while financing for other property types has become increasingly hard to come by. Now as questions about Fannie & Freddie's solvency rise to the surface multifamily investment may be in for a slowdown. Uncertainty about the ability for multifamily buyers and developers to secure debt will cause equity players to be more cautious. Additionally, even if the government bails out Fannie & Freddie the main focus will likely be on maintaining liquidity for the owner-occupied mortgage market, potentially at the expense of commercial lending programs.

The question then becomes which of three scenarios will play out: Will Fannie and Freddie regain their footing, either with or without government help, and continue to provide a backstop for multifamily investment? Will private players such as banks or life insurers step up to fill a void left by the uncertainty at the GSE's? OR Will the trouble at Fannie & Freddie be the straw that breaks the back of multifamily investment, making it just as difficult to finance in today's market as other property types?

Llenrock Group

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