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Report: Despite Interest Rate Volatility, Lending on Multifamily Properties in the Puget Sound to Remain Strong in 2020

Seattle, Kidder Mathews, Fannie Mae, Ginnie Mae, Freddie Mac
Diagram Courtesy of Kidder Mathews

By Meghan Hall

At large, the nation’s multifamily lending market is fairly healthy, with multifamily balances across all types of lenders charting growth during the first half of the year. The Puget Sound specifically has carved out a name for itself amongst lenders in recent years, and according to a recently released report by Kidder Mathews’ Simon and Anderson Team, and the regional multifamily market is expected to remain strong in coming years thanks to a somewhat surprising, strong base of lenders active in both central Seattle and suburban markets.

“It is a very active market, and it has a diverse base of lenders,” explained Alex Mundy, author of the report and a mortgage broker on Kidder Mathews’ multifamily team. “Greater Seattle is an ideal lending environment for multifamily assets. It has a diverse economic base, a highly skilled workforce and geographic barriers to entry. It should be a relatively stable market in periods of a slowdown, and the result of that is that it draws significant interest from lenders from around the country; it has a low-risk profile.”

On a national level, there was $1.46 trillion in outstanding multifamily loan debt in the United States as of the second quarter of 2019. Of that number, about 48.3 percent, or $703 billion, was attributable by agencies Fannie Mae and Freddie Mac. Banks, which Kidder Mathews defines as institutions from small credit unions to international names such as JPMorgan Chase, account for the next largest share of multifamily loan debt, at 30.6 percent. These firms provide anything from take-out financing to construction lending, which totaled $445 billion. Life insurance and pension fund accounts, which tend to focus on permanent debt on high-quality assets in core markets, account for ten percent of the market, or about $148 billion, and that share is slowly expanding. CMBS lenders, direct government lending, debt funds and private notes account for a smaller share of U.S. multifamily loan debt.

Throughout the Puget Sound specifically, Kidder Mathews studied multifamily loans over $1 million that originated in King, Pierce, Snohomish and Kitsap counties. In all, the regional multifamily lending market had $9.74 billion in outstanding loan debt at the end of the second half of 2018.  While agencies account for nearly half of loan originations nationally, they only were responsible for a third of multifamily loan debt in the Puget Sound, at $3.17 billion. Banks actually took up the largest share of the market, with $4.21 billion in loan volume, 43.2 percent of all originations. At a loan count of 51, or 17 percent, life insurance companies followed behind agencies, producing $1.66 billion in loan volume.

Mundy noted that the results were somewhat surprising, as the team did not expect to see so many active lenders across the Puget Sound. “I was surprised by the total number of active lenders in the region—170 in total,” said Mundy. “I was also surprised by the concentration of life insurance companies in particular; looking at the national debt, I didn’t think they, as well as banks, to have a big of a role here as they do.” 

However, Mundy also pointed out that the Puget Sound is in the midst of a construction boom—a sector of lending usually dominated by banks, while agencies are more permanent lenders.

“Just the fact that we have a large amount of construction activity means that the banks are going to be more active,” Mundy added. “There are also a large number of high-value assets coming online, which are attractive to life insurance companies and CMBS shops. Those assets drive competition from a diverse group of lenders.”

This increase competition has meant that while the agencies are dominant in Pierce, Snohomish and Kitsap counties, Freddie Mac, Ginnie Mae and Fannie Mae take the number two slot in King County, where core development usually translates higher-density and higher-dollar assets. Additionally, while CMBS and debut funds continue to occupy a minority market share, both types of lenders grew by 164 percent and 84 percent year-over-year, respectively. 

And, while this summer saw a series of larger rate swings—as much as half a percent—several times in the course of a few months, Mundy predicts that the 2020 market will remain stable, even though the volatility in interest rates can often cause uncertainty amongst both investors and lenders.

“I think it is poised to be a very competitive market,” said Mundy. “I can’t’ see the major national lenders who are already lending here wanting to pull back. We know that the agencies are going to be free to continue lending, at least at last year’s levels, so I think the market will be stable and continue to be robust.”