Multifamily lending sees steep pullback

Multifamily lending plunged in 2023 to just about half of the previous year's volume, according to a new analysis from the Mortgage Bankers Association. 

Approximately $246.2 billion in funding was issued for apartments consisting of five units or more, the trade group's annual report said. The total represented a 48.7% decline from 2022, which had transaction volume of $480.1 billion.

But more lenders participated in the market in 2023, 2,520 different entities, compared with one year earlier at 2,242. 

About half, or 51%, of active lenders issued five loans or fewer in 2023, MBA said. 

"Multifamily lending fell by roughly half in 2023 as sales transactions declined and far fewer property owners sought to refinance their loans," said Jamie Woodwell, MBA's head of commercial real estate research, in a press release. 

"The analysis shows that even with the drop in activity, the multifamily lending market remains broad and deep," he added. Last year's participants originated more than 36,000 loans backed by properties with values from tens of thousands to hundreds of million of dollars, MBA said. 

Multifamily mortgages originated in 2023 went to a variety of investors. The largest share, comprising 42% of the total amount, ended up in the hands of Fannie Mae and Freddie Mac.

Certain banks, including New York Community Bancorp and First Foundation, have needed capital infusions to help deal with their concentrations in multifamily loans. Meanwhile, New York Mortgage Trust, a real estate investment trust not connected to NYCB, recently raised capital to purchase both multifamily and residential assets.

Meanwhile, the top five multifamily lenders last year on dollar volume were Berkadia, Walker & Dunlop, JP Morgan Chase & Co, CBRE and Greystone.

Similar to the residential loan market, the jump in interest rates to decades-long highs, as well as the rapid surge in inflation, played a role in the multifamily pullback. By comparison, in 2022, the lenders saw lower rates and found itself in the tailwinds of a pandemic-era relocation trend, which helped drive many people to more affordable cities, according to Freddie Mac Multifamily researchers.   

Last year's activity showed early signs of a significant decline, due not only to decreasing interest from borrowers, but also tightened underwriting standards from banks, Woodwell previously noted. 

New multifamily-construction starts also began steadily trailing off in mid 2023, but has seen a pick-up since March. Still, the number of new apartment buildings that broke ground in June was more than 37% below where it was in May 2023.  

An oversupply of available units from the building boom of a few years ago is leading to moderating expectations in the multifamily space in the short term, Freddie Mac recently said. While demand remains robust, "the market will need to work through the cyclical high of new supply this year," it said in its mid 2024 outlook.  

A recent decline in mortgage rates — and with more likely to follow if, as expected, the Federal Reserve cuts rates starting at its September meeting — could help ease multifamily purchase and, especially, refinance activity, making maturing loans easier to get new financing to pay off the old note. Over the past month, residential lenders saw refinance volume return to their highest level in over two years thanks to the recent drop in interest rates.  

A short-lived fall in interest rates to start 2024 led to an 8% increase in multifamily investment conditions, with improvement seen across the country, Freddie Mac said earlier this year.