Editor’s note: The Lead Indicator is a new weekly column in the Commercial Observer by economist Sam Chandan of the Wharton School. This is the first column.
In New York City and across the country, multifamily and commercial real estate investment activity has plummeted since the onset of the credit crisis. The absence of an independently functioning securitization market and banks’ unremitting tightening of lending standards have robbed investors of low-cost credit’s vital spark. In their stead, a paucity of credit has sundered buyers’ and sellers’ gauges of value.
The bid-offer spread that can narrow almost instantly in a liquid securities market has resisted closing in the less efficient arena of commercial real estate. Real Capital Analytics reports that, amid this environment of patient buyers and willful sellers, transaction volumes have fallen to their lowest levels in 18 years and are rising only gradually from the trough earlier this year. In the face of the market’s cooling, delinquencies and defaults have necessarily grown in number and severity.
While private capital flows to commercial real estate have ebbed, the resulting strains on apartment investors have been tempered by the intercession of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.
Known commonly for their shared role in facilitating single-family homeownership, both Fannie Mae and Freddie Mac are also crucial sources of liquidity for the multifamily market. Through programs including Fannie Mae’s Delegated Underwriting and Servicing, private lenders are able to make mortgages in risk-sharing partnership with the larger enterprises.
As of the second quarter, Fannie Mae’s multifamily book of business was $177 billion, up 12 percent from a year earlier. The serious delinquency rate for Fannie Mae’s multifamily loans was just 0.5 percent; Freddie Mac reported a multifamily delinquency rate of just 0.2 percent. As other sources of credit have vanished, these quasi-governmental institutions have evolved into the keystones of apartment mortgage financing. Together, the GSEs accounted for 34 percent of multifamily activity in 2006. In 2008, that share had grown to 84 percent.