Multifamily Mortgage Lending at All-Time High – 2016 On Track to Set New Dollar-Volume Record
A comparison of the rental apartment industry with the single-family home sector is like a tale of two cities. The rental market continues to show historic strength while single-family housing activity remains subpar. Rental vacancy rates are at 30-year lows, rents are up, and apartment property values are at new highs. These robust fundamentals, coupled with low financing costs, have helped to propel mortgage lending on apartment buildings.
The drop in financing costs has been an especially important ingredient to the surge in new lending. Multifamily fixed-rate lending, similar to other commercial mortgage loans, tends to be priced relative to movements in 10-year U.S. Treasury yields. In July, 10-year Treasury yields recorded the lowest monthly average since the Federal Reserve began to track these in 1953 (Figure 1). The very low yields currently in the capital market have also enabled commercial mortgage rates to ease. In the second quarter of this year, interest rates on multifamily mortgage commitments made be Life Insurance companies had already fallen to the lowest recorded in more than 50 years, an average of 3.6 percent for 10-year, fixed-rate loans.
Using the CoreLogic public records data, we tabulated the volume of new lending and found that 2016 is on track to surpass last year’s record volume of new originations. Last year multifamily originations totaled more than $200 billion (Figure 2). During the first six months of 2016, originations were up 5 percent relative to the same period last year, and with the even lower interest rates in recent months, we could see multifamily lending post an increase of closer to 10 percent relative to 2015.
The increase in lending has occurred both for building acquisition and for refinance of existing properties. Purchase-money lending was up more than 10 percent year over year in the first half of 2016. And with loans made a decade ago reaching the end of their yield maintenance periods and valuation gains increasing equity, refinance of first liens or placement of mezzanine debt continue to supplement originations.
Looking at lending by location, multifamily dollar originations are generally concentrated in the largest metropolitan areas (Figure 3). he New York city metropolitan area tops the list on a perennial basis, followed by the Los Angeles metropolitan area; these two locales accounted for roughly 20 percent of dollar lending in 2015. The Chicago, Dallas, Anaheim and Washington, DC metropolitan areas were the next four in volume, with the top six accounting for about one-third of dollar originations last year.
With rental market fundamentals remaining strong and commercial mortgage rates at or near record lows, 2016 is on track to set a new record for multifamily originations.
Note: Kristine Yao tabulated the information in CoreLogic’s public records. Multifamily is defined as buildings with five or more units.
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