Bank Multifamily Investment Remains Healthy

Bank multifamily lending remains healthy, reported MPF Research, Dallas.

Bank multifamily loan volumes grew 11 percent year-over-year in 2016, down from a 16 percent peak at the end of 2015. Overall, multifamily lending equaled $390 billion, accounting for nearly 4 percent of all bank loan balances, MPF Research said.

Mortgage Bankers Association Vice President of Commercial Real Estate Research Jamie Woodwell noted that first quarter multifamily originations rose 14 percent across capital sources compared to first quarter 2016. “Multifamily properties remain the key force behind overall origination trends [which increased 9 percent including commercial property loans],” he said.

Barbara Byrne Denham, Senior Economist with Reis, New York, noted that two recent Federal Reserve interest rate increases did not raise multifamily cap rates. “Everyone had been expecting the first increase [in December] given the balance of employment, wage and inflation growth in the fourth quarter, yet the market responded rather benignly to the increase in March,” she said. “In fact, cap rates for multifamily properties actually declined in the first quarter.”

Byrne Denham said multifamily cap rates declined by 10 basis points to 5.9 percent in the first quarter from 6.0 percent in the fourth. “Both the mean and the 12-month rolling cap rates have declined steadily since early 2014 as the perceived strength in the multifamily market has boosted prices,” she said. “Although the multifamily effective rent growth rate slowed in the first quarter to a weak 0.2 percent, cap rates declined, which suggests that investors continue to see value in owning this asset class.”

Reis does not expect these trends to vary much going forward, Byrne Denham noted. “Cap rates are clearly at all-time lows as this preferred asset class has performed well throughout this recovery,” she said. “Many had expected that cap rates would go up this quarter with the hike in the Fed Funds rate, but we have frequently cautioned that cap rates do not necessarily move in step with the Fed Funds rate.”

Byrne Denham noted that while the dollar volume of multifamily sales fell significantly in the first quarter to a three-year low, both the average and median sales prices per unit remained mostly in line with previous quarters.