Among the topics of cconversation currently making the rounds in the multifamily housing finance community in the Midwest are the effects of the recession and overbuilding; the impact of low interest rates; the return to urban areas; and the popularity of historic rehabilitation tax credits. Heartland Real Estate Business selected six companies that are active in the region and spoke with the following individuals in their organizations about these and other subjects:

• Keith Gloeckl, chief investment officer of Baltimore-based MuniMae Midland, a multifamily housing financial solutions provider;

• Tony Kolomayets, senior director of Boston-based Tremont Realty Capital, a capital solutions provider for multifamily and commercial real estate owners and developers;

• Mike Dunn, vice president and principal of Birmingham, Alabama-based Collateral Mortgage Capital, a multifamily and commercial real estate mortgage banker;

• Mark Levin and Tony Raimondi, regional managing directors for Bethesda, Maryland-based AMI Capital, a multifamily and commercial real estate mortgage lender;

• Dan Brendes, senior vice president and head of production, and Shane Sonneveldt, vice president, for the Boston-based Berkshire Mortgage Finance Bethesda Platform, a commercial and multifamily lender and mortgage banker; and

• Monty Childs, vice president of Baltimore-based Allfirst Mortgage Corporation, a full-service lender specializing in mortgage financing for multifamily and residential care facilities.

MUNIMAE MIDLAND

According to Gloeckl, many urban areas in the Midwest, like Chicago, Detroit and Indianapolis, are overbuilt with multifamily product — a result of the momentum created by the robust economy a few years ago. Certain submarkets, even some secondary ones, still offer opportunity. “However, it is a bigger struggle than it was in the past to make deals work, which leads to a decline in the number of multifamily housing starts,” Gloeckl says. Amidst low interest rates and a highly volatile stock market, the focus has shifted to acquisition of existing assets, where heavy demand has driven cap rates as low as the 6’s, Gloeckl adds.

MuniMae Midland’s strength is in traditional market rate and Section 42 garden-style apartments. However, it works in both suburban and urban contexts. “We have looked at some lofts in Pittsburgh,” Gloeckl notes. The company is also involved with redeveloping the Kales Building, an old mercantile building in downtown Detroit, which is being acquired and converted into high-rise apartments. The project, located at 76 West Adams Street near the Detroit Athletic Club and in close proximity to Comerica Park and Ford Field, falls within the boundaries of a redevelopment area and makes use of historic rehabilitation tax credits. Closing is expected in March.

TREMONT REALTY CAPITAL

As Kolomayets explains, builders for the last 10 years have preferred condominiums (both new and converted), leading to an excess of for-sale product. As a result of this excess supply and low interest rates, the cost of buying has dropped. At the same time, because developers have generally shunned rentals, and since the high cost of land in urban areas necessitates luxury product, new apartments are usually priced on the high end. The result is that now, mortgage payments are starting to compare favorably with monthly rents, thus halting construction of new rental units.

According to Kolomayets, the rental market has remained strong overall, with demand high among prospective tenants, buyers and lenders. For this reason, he expects that once the excess supply of condominiums is absorbed, new apartment development will flourish. He points out, however, that the rate of recovery will occur at different rates depending on the level of overbuilding in the particular metropolitan area.

For instance, Kolomayets notes that in high-barrier metros such as Chicago, Detroit and the Twin Cities, the arduous nature of the development process has traditionally discouraged all but the most well-connected local players, so the potential for excess is not so great. The market is relatively healthy in these cities, and additional rentals will be justified in 12 to 18 months. On the other hand, says Kolomayets, national developers are more likely to be active in markets where barriers are lower, resulting in extreme supply/demand imbalances. In these areas, the product type is not currently doing horribly, but it will take longer to absorb existing inventory, and new apartment construction will not make sense for another 2 to 3 years.

Kolomayets sees a major opportunity in the middle tier of the housing market, which remains woefully underserved. “Affordability is still one of the biggest issues in the Midwest,” he says. “Reasonably priced homes are increasingly hard to find in the suburbs, where the $400,000-and-below properties have yet to drop in price.”

Yet, this void has been filled to some extent by owners of 1970s-era, inner-ring, Class B and C multifamily complexes that are renovating their properties and converting their rental units to $100,000-$200,000 condominiums. According to Kolomayets, these renovations are selling like hotcakes to traditional middle class households making between $30,000-$50,000 per year and looking to take advantage of low borrowing costs. Older Class B and C condominium and rental communities in urban areas are also proving attractive to young professionals who are tightening their belts during the current downturn.

COLLATERAL MORTGAGE CAPITAL

According to Dunn, the suburban high-end apartment market is suffering, and landlords are offering more concessions due to high vacancy rates. Moderate overbuilding is part of the problem, but higher-priced properties are always the first to be affected by economic slowdowns. And again, low borrowing costs are playing a role with mortgage payments now becoming competitive with monthly rents.

“There has been almost a complete drop-off in suburban multifamily construction,” Dunn says. “Existing projects are being completed, but new ones that were in the planning stages have been put on the shelf.”

However, Collateral Mortgage Capital also finances loft and high-rise residential properties in urban settings, and the company is particularly optimistic about this product. “With the historic rehabilitation and Section 42 tax credits, more of these projects are successfully being developed,” Dunn notes. He points to Kansas City as an example, where the housing market has remained relatively healthy compared to the city’s suburbs.

Dunn adds that with money currently so cheap, a number of Collateral Mortgage Capital’s clients are anxious to refinance their properties. And, in order to avoid substantial pre-payment penalties, its clients are taking forward commitments on loans from life insurance companies, thereby locking in today’s low interest rates.

AMI CAPITAL

AMI Capital is playing a major role in the ongoing gentrification of downtown Kansas City. Here, the effort on the part of City officials and business leaders has not involved much ground-up development. Instead, builders are converting old warehouse and office space into residential lofts.
AMI has put more than $50 million into such redevelopments, and the company just completed a $30 million deal in which two office buildings in the central core are being redeveloped and made into apartments. This project, like many others in the downtown Kansas City area, takes advantage of historic rehabilitation tax credits. “These tax credits make the deal feasible from a development standpoint,” Levin says.

AMI Capital sees tremendous potential for such in-town living across the Midwest. “Loft conversion has been very hot in Chicago over the last several years,” Levin notes. “Other markets such as Indianapolis and Cincinnati are also beginning to realize that people want to be downtown, and that you can create activity in your downtown if you have the housing.” The company also focuses on suburban garden apartment complexes, where, according to Raimondi, low interest rates are having a major impact, thereby increasing interest among investors and lenders, while at the same time, cutting into demand for rental units.

BERKSHIRE MORTGAGE FINANCE

According to Brendes, Berkshire Mortgage Finance is experiencing limited financing opportunities because owners are very hesitant to put new money into their holdings. “We are seeing a lot of properties that are still not stabilized,” he says. “Higher rents are not happening until vacancy rates and concessions go down, and so owners and developers cannot see what new investment dollars can do for them right now.” This climate should improve once the rate of job growth accelerates.

Brendes also observes that the lending market now offers a more extensive array of financial tools than it did even 2 or 3 years ago. “These additional options in mezzanine and bridge financing have had the effect of expanding what borrowers can do with their assets,” he says.

Berkshire Mortgage Finance — like so many of its contemporaries — is involved in the rehabilitation of historic buildings in urban areas. In two Fannie Mae forward-financed deals in St. Louis — the 110-unit, Lafayette Square Apartments and the 113-unit Forest Park Apartments — the borrower utilized union labor for the rehab work, thus allowing Berkshire Mortgage Finance to sell the mortgages directly to the AFL-CIO Housing Investment Trust.

“The direct placement of the mortgage-backed security with the ultimate investor allowed for unique terms,” Sonneveldt explains. “One such term is that the borrower is able to draw down the loan amount in monthly draws, as opposed to one lump sum. This schedule reduced the negative arbitrage associated with most forward loans. In addition, the sale of the federal and state historic tax credits provided additional equity.”

ALLFIRST MORTGAGE CORPORATION

Childs remains upbeat about the current market for multifamily housing in the Midwest. “This region of the country has historically avoided over-built conditions,” he says. “Virtually every market currently has a reasonable balance between supply and demand, and even the relatively soft markets have good deals in them.” He is particularly optimistic about the prospects for the Detroit and Twin Cities metropolitan areas.

Childs notes that although economic uncertainty resulted in lower volume during 2002, Fannie Mae and its lenders have not retreated. In fact, Fannie Mae has, in recent months, moved to increase its competitiveness by reducing underwriting floors on most loans by approximately 25 basis points.

Michael J. Berne is president of New York-based MJB Consulting, a real estate consulting firm.


©2003 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.