The good news, according to this article, is that multifamily assets are getting picked up on the offer side. As you may remember, in 2009 and 2010 we talked about the intractable bid-offer spread in CRE: a situation where sellers weren’t being forced to sell (the offer side) and buyers were expecting large discounts (the bid side) yielding very low deal volume. So, now we’re seeing sellers who could hang in and actually get paid full price for their assets. Seems like pretty good news.
Like everything, however, there’s a cost. According to the article,
The dollar volume of multifamily loan originations by Fannie Mae and Freddie Mac hit an all-time high in the fourth quarter, according to a Mortgage Bankers Association index that has tracked the data for 11 years. The government-supported entities increased lending by selling $33.9 billion of bonds tied to apartment buildings last year, from $21.6 billion in 2010, according to data compiled by Bloomberg.[my hyperlinks]
So, the GSE’s – who’s debts are backed by the the US Government – are lending money to the CRE market, using money financed by a bond market, propped up by the Federal Reserve (also backed by the US Government). Wow! It’s no wonder the multifamily market is doing well.
Is this sustainable? Well, the Fed has indicated its willingness to keep short term rates low for a long time. And, the Fed has shown willingness to buy bonds, including MBS and GSE debt, to keep long term rates low (quantitative easing). Have a look at this excerpt of the Fed balance sheet to get a sense of magnitude.
So, is this the new paradigm or is this a temporary state of affairs? As they say, “at some point” this has to be inflationary and the Fed will be forced to reduce it’s balance sheet. But, will CRE markets have recovered sufficiently to prevent stalling upon Fed exit? It strikes me as having our cake and eating it, too.
My concern is the formation of a bubble in multifamily CRE. These early cycle successes will attract more capital seeking outsized relative returns. The increase in capital will contribute to the creation of additional outsized returns engendering growing notoriety and a flood of new capital; rise and repeat. Before you know it, we have a bubble, courtesy of the US government.
Of course, between now and then, we might just enjoy some good deal volume and decent returns. Not such a bad thing, especially considering how things might have looked without massive monetary and fiscal stimulus.
#CRE #finance #economy