Q&A with Fannie Mae and Freddie Mac's Multifamily Leadership Teams

August 02, 2023

Rich Martinez, Greystone’s head of Agency Production, sat down with Rob Levin, Multifamily Chief Customer Officer & Senior Vice President at Fannie Mae, and Steve Johnson, Senior Vice President, Multifamily Production and Sales at Freddie Mac, about the current multifamily market and the GSEs’ outlook for lending in the balance of the year.

Rich: What is your outlook for the multifamily market in Q3 and Q4?

Rob: Let me start by noting the market forecasts I’ll share today are from Fannie Mae’s Economics & Strategic Research Group and are not necessarily those of Fannie Mae or its management. They are not an indication of Fannie Mae's future business or results, and actual outcomes and their impact on Fannie Mae will depend on many factors.

While much of the economic data in recent months paints a mixed picture of the economy, the ongoing resilience in employment, strong housing demand, and current financial conditions do not point to an immediate downturn. We have therefore upgraded our 2023 GDP forecast to 0.1 percent from negative 0.3 percent on a Q3/Q4 basis, while also downgrading our 2024 forecast by a similar magnitude (0.8 percent from 1.2 percent). This reflects a shift in the start to our forecasted modest recession to the fourth quarter of 2023. Timing the business cycle is difficult, therefore there are substantive risks to our inflation, interest rate, employment, and housing forecasts. However, fundamentally, we believe that the multifamily sector will remain steady through 3Q2023 but begin to slow in 4Q2023. Demand has held up during the first half of the year, albeit at a slower pace than had been seen over the past two years. We expect that with the recession possibly occurring later in the year demand should hold up over the summer but begin to slow down during the fall. Our estimate for rent growth is between 1.5% and 2.0% in 2023 but with vacancy possibly increasing to between 6.0% and 6.5% due to elevated levels of new construction expected to complete and deliver this year.

Steve: Despite an unpredictable market thus far this year, as a business, we are quoting, underwriting and funding deals daily. We are focused on optimizing our volume cap, producing the right mix of affordability, volume, risk and economics. Market conditions have certainly impacted volume for the first half of the year and our forecast has been adjusted as such. Typically, we see volume pick up in the second half of the year. At present, it is unclear if this year will follow this historical trend. Regardless, we remain acutely focused, engaged and ready to execute the moment the market accelerates.

L to R: Rich Martinez, Greystone; Rob Levin, Fannie Mae; Steve Johnson, Freddie Mac
L to R: Rich Martinez, Greystone; Rob Levin, Fannie Mae; Steve Johnson, Freddie Mac

Rich: The Agencies have gained significant market share over the past year after regional bank volatility. What’s your strategy to retain that?

Rob: Our Delegated Underwriting and Servicing (DUS) platform was built to provide countercyclical stability to the multifamily debt market. We continue to provide needed liquidity and remain committed to our mission of financing quality, affordable rental housing across the country. We were active across all market segments while building a balanced loan portfolio. The current market requires creativity to get transactions to the finish line, but we cannot lose focus on safety and soundness. 2023 will remain challenging, but I believe we’re ready for whatever comes our way.

Steve: Freddie Mac remains committed to its mission to provide liquidity, stability, affordability and equity to the market, throughout the real estate cycle. We continue to lend to a wide array of qualified sponsors, and we are supporting emerging lenders and borrowers with the goal of providing greater access to our capital. We’ve also identified and are supporting “Impact Sponsors,” who are making a difference in the lives of renters by providing essential tenant services.

Rich: How are the impending loan maturities expected to impact Agency lending volumes in 2023, and 2024?

Rob: We spend a significant amount of time analyzing our maturing loans and work closely with lenders and borrowers, as we always have, making adjustments where we can to assist in distressed transactions. We have seen new loan requests on maturing loans from other debt sources, e.g., debt funds, and evaluate these as we do all requests.

Steve: Much of our business at the moment is made up of refinances, and we expect that to be the trend for a while as the acquisition market hasn’t fully rebounded. The rising rate environment is requiring some sponsors to put cash-in at the closing table, and we anticipate that to continue as we see impending maturities on high LTV loans that were originated over the last 12-24 months. This also may lead to more properties hitting the market in the next year or so, which would help the investment sales market recover. Again, these are the factors we monitor, evaluate and manage as Freddie Mac continues our focus on serving our mission while optimizing our volume cap.

Rich: Based on recent Fed Funds rate activity, how should multifamily investors approach the remainder of the year?

Rob: clearly subdued, which is not likely to occur until there is clear evidence of labor market softening. We believe by the time that happens a recession will have likely been set in motion. We therefore see the Fed’s decision regarding how long to keep rates high and how high as a major risk over the next year, with the question of a downturn more a matter of “when” than “if.” As a result, our current forecast is that the Fed Funds Rate will increase to 5.4% by year-end but that the 10-year Treasury Rate will remain fairly stable, perhaps ending the year at 3.5%. As a result, multifamily investors should expect that interest rates are likely to stay elevated and that renters may become more cautious later in the year, especially if job growth stalls out.

The past 15 months have proven challenging across all asset classes as both borrowers and investors navigate market volatility and macro influences. On the supply side, we have seen a natural decline in loan volumes as rates have increased; however, there is pent-up demand and, with each dip in interest rates, we continue to see borrowers bring their deals to market. On the demand side, the need for duration has declined as the larger Agency mortgage market has extended after enjoying the low interest rates during COVID-19. However, the multifamily market fundamentals have remained strong relative to the broader commercial real estate market, and the performance and transparency of the DUS MBS and Agency CMBS market continue to attract investors.

Steve: When we see a measure of relative rate stability, it is more likely the market will start to function properly. Rate stability typically leads to a “new normal.” This stability is where buyers and sellers can best find agreement and alignment – mainly because transaction costs are understood and stable.

With the current volatility in interest rates, if a deal pencils, it’s a good time to take advantage of our Index Lock. Shorter-term fixed-rate debt can offer flexibility for borrowers who have historically opted for floating-rate debt but are not thrilled with how quickly SOFR has risen. We are seeing more activity in our five-year fixed program, which includes prepayment options for those sponsors looking for an alternative to floating-rate debt.

Rich: What industry trend are you keeping an eye on?

Rob: New apartment deliveries are expected to peak between 2023 and 2024. We are concerned that with more than one million units underway, much of the supply will deliver just as job growth slows and a recession takes place, leading to higher vacancy rates. It is important to note that on a national basis there is still a shortage of housing, both single-family and multifamily. We expect that this new supply will be absorbed but it will take a little longer out into the forecast, likely into 2025 and 2026, creating some short-term oversupply issues in certain submarkets. However, if new construction slows down, as it appears to be doing based on preliminary information, market conditions could quickly tighten starting in 2025.

Steve: Given market dynamics, we are seeing growing interest in our Workforce Housing Preservation features. This is ideal for borrowers who want to provide a private sector approach to help combat the affordable housing crisis through voluntary rent restrictions included in the Freddie Mac loan agreement. In return for setting aside a certain percentage of units at affordable levels, we offer incentives through pricing or and/or credit terms. Another example is the expanded financing options under our TAH Bridge Loan program. We’re providing more flexibility with these new offerings which, in addition to LIHTC properties, now also include non-LIHTC properties that have a long-term affordability commitment. These short-term bridge loans allow borrowers to quickly acquire a property and adequately address the scope of work and source of funds they need to rehab.