Multifamily investors may have something to look forward to next year according to recent signals from FHFA, the Federal Reserve, and Freddie Mac. After a sluggish 2023, market experts anticipate increased transaction volume thanks to stabilizing interest rates, among other factors. As activity picks up, new policies enacted over the past year will apply to multifamily transactions.
FHFA reduces caps, excludes workforce housing
The Federal Housing Finance Agency (FHFA) announced in November that 2024 multifamily lending caps for Fannie Mae and Freddie Mac (the Enterprises) will be reduced to $70 billion each, for a total of $140 billion during the calendar year.
According to FHFA’s multifamily cap fact sheet, “FHFA anticipates the 2024 cap levels will be appropriate given current market forecasts. However, FHFA will continue to monitor the multifamily mortgage market and increase the caps if necessary. If FHFA determines that the actual size of the 2024 market is smaller than initially projected, FHFA will not reduce the caps.”
As in 2023, FHFA stipulates that a minimum of 50 percent of multifamily business conducted by Enterprise lenders must align with “mission-driven affordable housing, in an effort to ensure a strong focus on affordable housing and underserved markets.” This year, however, loans supporting workforce housing properties will be exempt from the volume caps. (FHFA created the workforce housing mission-driven category in 2023 but did not exclude it from last year’s caps.)
We have not seen the lending caps at $70 billion each since 2021, when the cap structure only covered the four quarters of the year.
In 2022, we saw a positive bump to $78 billion each, which at the time was optimistic as FHFA continued to monitor impacts of COVID-19. But as the market began to show a decline, the 2023 caps were nominally reduced to $75 billion each. Even though caps are down, the exclusion of workforce housing may indicate that FHFA expects total lending activity to increase, given the anticipated number of workforce housing transactions.
Transaction volume expected to increase
Scott Belsky, managing director of Partner Valuation Advisors, sees potential for increased activity in 2024. Belsky notes:
As many multifamily transactions executed in 2020–22 were financed with short-term, floating rate debt, these loans continue to face loan maturities or expensive interest rate cap extensions; therefore, we anticipate transaction volumes to increase.
Significant interest rate volatility in the market has prolonged a period of investor price discovery. As interest rate expectations begin to stabilize, we anticipate that the bid-ask spread between buyers and sellers will narrow, resulting in increased 2024 transaction volume.
These two observations, along with the anticipated reduction of interest rates to the mid 4 percent range, suggest the likelihood of increased lending transactions in 2024.
In addition, the Mortgage Bankers Association (MBA) released an opinion that lending could increase 26 percent over 2023 levels for all asset types totaling approximately $559 billion in 2024. Of that total, they expect a 19 percent increase in multifamily transactions with an anticipated lending amount totaling $339 billion for 2024.
Freddie Mac’s recently released 2024 Multifamily Market Outlook supports these observations: Although interest rates are expected to remain elevated in 2024, we expect some interest rate stability which could spur multifamily lending volume for the year. With interest rate stability, cap rates and property values should stabilize allowing buyers and sellers to agree on asset value to facilitate for more transaction volume.
Despite the short-term supply headwind, over the longer-term the multifamily market will continue to be supported by the overall shortage of housing, an expensive for-sale housing market, and the next generation of renters entering prime renter age.
New radon regulations
New radon testing standards for Fannie Mae and Freddie Mac multifamily loans took effect June 30, 2023. The five main changes in FHFA’s updated radon testing policy are:
Required radon testing at multifamily Enterprise-backed properties, regardless of property location, subject to some exemptions and deferrals.
Increased required testing from 10 percent of ground floor units to 25 percent of ground floor units, with no fewer than one test per building.
No more than 15 percent lost, faulty, inaccessible tests or environmental professional discretion.
Required environmental professional or property representative to provide tenant notifications of radon testing (access, sampling condition requirements, etc.)
Provide additional guidance for lenders and environmental consultants on the Enterprises’ radon standards. As part of such guidance, the Enterprises will reinforce the need for compliance with state and local radon laws.
Note that the updated policy continues to allow an environmental professional to manage the radon testing process. FHFA continues to monitor the multifamily mortgage market and has been working with the U.S. Environmental Protection Agency (EPA) to determine if any adjustments will be warranted to these standards in 2024.
