Lument convened its latest webcast on September 18 on what turned out to be a significant day for the economy. We titled our program—Prospects for Multifamily: Are We Reaching a Reset? —and just an hour after the webcast ended, the Federal Reserve provided a definitive answer, lowering the federal funds rate 50 basis points. This move exceeded the expectations of our audience: when polled, only 15% predicted a half-point cut, while the vast majority—75%—anticipated just a quarter-point drop.
We selected the two panelists for our webcast with distinct perspectives on what the future may look like and how a reset might unfold. Chris Flynn, senior vice president and multifamily chief underwriter at Fannie Mae, has a broad view of the market. Her team looks at between 4,000 and 6,000 potential transactions a year. Chris Eisenzimmer, president of Blue Ridge Atlantic Development, is a for-profit affordable housing developer and, accordingly, views the market through a very specific lens. Eisenzimmer also has the advantage of being knowledgeable about two very different markets. Although headquartered in the Southeast, Blue Ridge Atlantic is in the process of expanding into the Pacific Northwest.
While the Fed’s decision to lower interest rates will undoubtedly energize multifamily deal flow, Flynn made the point that Fannie Mae had already seen a gradual but steady influx of transactions, acquisitions as well as refis, across all multifamily asset classes. “Expectations and confidence have been improving since the spring,” she said. Flynn noted that the agency has hired five additional underwriters to keep its queues cleared—and although it will take a month or two to bring these new hires up to speed, Fannie Mae is already gearing up for an uptick in the market.
Given the longer lead times typically required to complete affordable transactions, the rate cut will take a little longer to make its impact felt than in the conventional market. As Eisenzimmer noted, “We will see some relief when it comes to new construction loan pricing and permanent loan rates, but many of our swaps and collars we currently hold on construction loans have rate cuts priced in.” But the rate cuts will not affect the firm’s underlying philosophy. Eisenzimmer maintained that Blue Ridge Atlantic will continue to underwrite deals conservatively.
Momentum Building for Affordable Housing
While interest rates may not have an immediate effect on affordable housing, Eisenzimmer believes that heightened sensitivity to the housing crisis has led many local governments to start doing more to encourage development. Although the climate in the Pacific Northwest is not as favorable for for-profit developers as in the Southeast, he noted that there is a great deal of government support in the region for affordable housing and that entities such as King County and the Housing Trust Fund have shown a willingness to streamline the process by using a combined funder form. He also cited Seattle’s willingness to step up and help sponsors complete their projects at the conclusion of a 141-day strike by concrete truck drivers in 2022 as evidence of their commitment to go the extra mile for affordable housing. “We are seeing a similar spirit in many other areas of the country, even when jurisdictions lack comparable resources,” Eisenzimmer said.
Not surprisingly, Eisenzimmer offered a list of steps that the federal government could take to increase the supply of affordable housing. These included expanding the 9% low-income housing tax credit, eliminating the basis reduction for energy efficiency and renewable energy tax credits, and simplifying or eliminating the 10-year and related party rules. He was ambivalent, however, about the wisdom of reducing the 50% test to 25%, a measure advocated by other developers, feeling that over the long term it might have a negative impact on equity pricing and deal feasibility as a whole.
Flynn noted that Fannie Mae developed two programs during the last few years to promote the development of affordable and workforce housing. The first, the Sponsored-Initiated Affordability program, provides better pricing and underwriting flexibility to developers of multifamily affordable housing who agree to make at least 20% of their units affordable for tenants earning 80% or less of area median income (AMI) and do so for the life of the loan. The second is the Sponsor-Dedicated Workforce program, which provides similar benefits to owners of conventional multifamily apartments. “Our goal is to preserve workforce housing by providing investors with an alternative to value-add strategies,” Flynn said. This initiative has been particularly popular. So far in 2024, she reported, Fannie Mae has provided $2 billion in loans under this program.
Expenses Remain a Concern
One benefit of lower rates is that it will offer some breathing room for investors, who have been contending with a sharp run-up in expenses—particularly insurance premiums—over the last two years. Fifty-six percent of the audience polled before the webcast named expenses as their biggest challenge. Eisenzimmer cited an apartment community in Houston that Blue Ridge Atlantic acquired five years ago. “When we closed, we were paying $400 a door in insurance,” he recalled. “Currently, we are paying more than $1,600.”
Eisenzimmer described strategies he is using to counter surging premiums. With its diversified footprint, Blue Ridge Atlantic was able to successfully restructure its insurance coverage and secure a portfolio level premium, which it is able to allocate, within reason, among its communities. The company has also put in place programs designed to encourage insurance companies to view it in a more favorable light at renewal time. “No one wants to face these kinds of rising costs,” Eisenzimmer said, “but they have made us take a more hands-on approach to managing and offsetting our risk.”
For its part, Fannie Mae has been reviewing its insurance requirements. While standing firm on total coverage, Fannie Mae is considering changes in its guidance on deductibles, Flynn reported, and in some cases has approved waivers for higher deductibles. “We feel that this is a reasonable way to meet the market part way,” she said.
Flynn also had some other good news for investors. Right before the webcast, she checked in with Fannie Mae’s insurance team, who told her it was starting to see some moderation in costs, particularly in Florida, where the reinsurance market seems stronger than it has been.
Operational Challenges
There are, however, challenges that lower interest rates will not alleviate. For Blue Ridge Atlantic, which doesn’t self-manage, one of them is turnover at property management companies. “It has been extremely challenging for them to retain top quality people in that all-important regional manager position, as well as dependable onsite managers,” Eisenzimmer said.
Collections have also been an issue for Eisenzimmer. He believes that subsidies issued during the pandemic sustained collections after COVID faded into the background, but that this cushion has dried up, straining tenant finances. “The last thing we want to do is evict tenants,” he said. “It’s a time-consuming, expensive process, but at the end of the day, properties can’t convert without collecting rent.” Fortunately for all concerned, he said, he has started to see evictions winding down.
Fannie Mae has been working on programs that improve tenants’ creditworthiness, not simply helping avoid eviction but enabling them to expand their opportunities. Under its Positive Rent Payment program, Fannie Mae connects property owners of Fannie Mae-financed buildings with fintech providers who can report the positive rent payments of their residents, which historically have not been reported, to the credit bureaus.
“Reliable on-time payments can help renters increase their credit score,” Flynn said. “In turn, this lowers the cost of financing, enabling them to purchase a better car, find a better job and improve their quality of life. It sets the stage for people to start a small business, borrow for education, or buy a house.” There are also benefits for investors, she noted. When landlords report rent payments, renters are incentivized to pay on time, reducing delinquencies, evictions, and turnover. Since the program began two years ago, 43,000 renters living in 2,800 properties established a credit score, and those who already had a score saw it improve by an average of 35 points.
The Next Economic Milestone
Now that September 18 and the rate cut are in the past, the next big day for the economy will be Election Day. We asked both Eisenzimmer and Flynn to predict how the outcome might affect business. Eisenzimmer saw pluses and minuses regardless of who wins. A Trump administration, he said, will promote deregulation and lower taxes to bolster growth but in the process may generate inflation and supply chain problems. He believes that the Harris team is very supportive of affordable housing but at the same time advocates for rent caps, which are counterproductive. “But unless the executive and legislative branches are controlled by a single party,” he said, “there will be very little change at the end of the day.”
Given her position, Flynn was circumspect, saying only that she believes the agencies will persevere no matter who is in the White House. “We provide a steadying presence for the market,” she said. “Our policies and our resources represent a win-win for everyone concerned.”