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. Here's a rundown of what to expect in 2024.
FHFA Reduces CAPs, excludes Workforce Housing
The Federal Housing Finance Agency (FHFA) announced on Tuesday, November 14th that the 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% 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, also sees potential for increased activity in 2024. Belsky notes the following:
- 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% over 2023 levels for all asset types totaling approximately $559 Billion in 2024. Of that total, they expect a 19% 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 in Effect
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:
- Requires radon testing at multifamily Enterprise-backed properties, regardless of property location, subject to some exemptions and deferrals.
- Increases required testing from 10% of ground floor units to 25% of ground floor units, with no fewer than one test per building.
- Allows no more than 15% lost, faulty, inaccessible tests or environmental professional discretion.
- Requires the environmental professional or property representative to provide tenant notifications of radon testing (access, sampling condition requirements, etc.)
- Provides 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.
New Data Collection Requirements Coming Soon
As the beta phase of the Fannie Mae expanded data collection requirements for Property Condition Assessments (PCA), and Seismic Risk Assessments (SRA) wind down this month, we anticipate the announcement of the new requirements and the release of the updated standardization form soon. Fannie Mae is considering the addition of 30+ data points to be collected with the PCA and three (3) with the SRA to capture property characteristics related primarily to climate resilience. Currently, Fannie Mae's resilience requirement is a data collection effort only. The data is to be collected on a form that's entered into their data digitizer and not included in the PCA/SAR report. This move toward 'digital' due diligence allows the user to quickly access, analyze, and apply property data for faster, better decision making.
Stay On Top of Market Conditions with a Qualified Consultant
As the market picks up in 2024, multifamily investors can stay abreast of current market conditions and regulatory changes by working with a consultant who is experienced in multifamily transactions and diverse lending platforms. For streamlined transactions, choose a consultant that offers complete due diligence and valuation services. Obtaining all required third-party reports from a single source saves time and ensures consistent property data between reports.
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Drew H. McCreery
Drew H. McCreery serves as Managing Director, Multifamily and Technical Director of Agency Services at Partner Engineering and Science, Inc. Leveraging over 20 years of experience, Mr. McCreery is responsible for the overall quality and consistency of Property Condition and Environmental reports associated with the Agency Lenders including Fannie Mae and Freddie Mac.. He is a member of the American Institute of Architects and has a Bachelor of Architecture from California State Polytechnic University of Pomona. Drew frequently shares his deep knowledge of the policy, regulatory, and quality requirements as they pertain to the agency lending landscape through blogs, articles, and speaking engagements. He holds a BA in architecture from California State Polytechnic University of Pomona and pursued Architectural Studies at the National Technical University of Athens, Greece.
