Multifamily lending to drop 20% to 40% this year: Freddie Mac

Multifamily mortgage originations could be down between 20% and 40% this year, according to Freddie Mac. Where originations ultimately fall in that broad range will depend on the economic recovery and how well the coronavirus is contained, the government-sponsored agency said.

"The economic challenges brought on by the COVID-19 pandemic will have a meaningful impact on the multifamily market in 2020," Steve Guggenmos, vice president of multifamily research and modeling for Freddie Mac, said in a press release.

"The industry entered the current recession on solid footing and is well-positioned to absorb the impacts of the recession due to substantial growth over the past several years," he added.

There was $374 billion in multifamily mortgage originations in 2019 across all investor types, Freddie Mac estimated, and 2020 had started off strong, before the spread of the coronavirus began to affect employment and where people choose to live.

Separately, the Mortgage Bankers Association reported there was $364.4 billion in multifamily lending last year, a 7% gain over 2018 and a new all-time high.

"Last year's numbers pointed to a robust and diverse multifamily lending environment, but conditions have changed with the onset of the COVID-19 pandemic, the greatest being increased uncertainty," said Jamie Woodwell, the MBA's vice president of commercial real estate research, in a press release.

"Interest rates are now lower than they were a year ago, and data has yet to show any marked changes in property incomes or values,” Woodwell added. “Demand for refinancing because of low rates, particularly for government-backed loans, is unlikely to overcome a drop in sales transactions, which means multifamily borrowing and lending is likely to drop this year."

Freddie Mac and Fannie Mae held a combined 38% share of the multifamily market last year, according to the MBA. Other sources of multifamily funding include banks, life insurers, private activity bonds and commercial mortgage-backed securitizations.

Freddie Mac's own business had large spikes in volume at the start of March.

That dropped off in the later part of March and in April as lockdowns were underway, but by June, volume was back up above levels Freddie Mac had seen earlier in the year.

However, that late second quarter increase should not be read as a sign of optimism for the multifamily lending market as a whole.

"Our volume trends are not reflective of the overall market trends since our role as a government-sponsored enterprise is to provide liquidity, especially during a time of market stress and as other market participants are sidelined during this uncertainty," the report said.

In the worst-case scenario, total multifamily volume will drop this year to $221 billion and then by another 5% in 2021 to $210 billion, the company predicted. The downside scenario anticipated the U.S. economy remaining in a recession throughout 2021.

Among the factors that will affect the underwriting of multifamily loans are rising vacancy rates and lower rents. Vacancy rates, which were at 4.4% in the first quarter according to Real Page data cited by Freddie Mac, will grow 200 to 250 basis points by the end of the year, the GSE estimated. At the same time, rents that had risen 2.9% over the previous year in the first quarter, Real Page said, will drop between 1.2% and 1.7% by the fourth quarter in Freddie Mac's projections.

That will reduce property owner income on a year-over-year basis between 3.3% and 4.2%.

However, if by year-end unemployment is under 8% and real gross domestic product is down roughly 2%, Freddie Mac is predicting in the area of $299 billion of multifamily mortgage originations this year, before rebounding to $375 billion in 2021.