Recent signals from FHFA, the Federal Reserve, and Freddie Mac suggest that multifamily investors could expect positive developments in 2024. Following a slow 2023, experts predict a rise in transaction volume attributed to stabilizing interest rates and other contributing factors. As market activity gains strength, multifamily transactions will be subject to new policies implemented over the preceding year. Here’s a summary of what multifamily investors can anticipate in 2024.
FHFA Lowers Multifamily Cap Rates, Excluding Workforce Housing
On Tuesday, November 14, the Federal Housing Finance Agency (FHFA) disclosed that the 2024 multifamily lending caps for Fannie Mae and Freddie Mac (referred to as the Enterprises) would be lowered to $70 billion each, amounting to a combined $140 billion for the calendar year. According to FHFA’s multifamily cap fact sheet, the agency forecast these 2024 cap levels as suitable based on existing market forecasts. Also, FHFA pledges to monitor the multifamily mortgage market diligently and adjust the caps as required. If the FHFA finds that the actual size of the 2024 market is smaller than initially projected, the agency will refrain from reducing the caps.
Similarly to 2023, FHFA mandates that at least half of the multifamily transactions facilitated by Enterprise lenders must adhere to the “mission-driven affordable housing” criteria to emphasize the importance of affordable housing and underserved markets. However, this year, loans backing workforce housing properties will not be subject to the volume caps. (Although FHFA introduced the workforce housing mission-driven category in 2023, it was not excluded from the caps of the previous year.)
The lending caps have not reached $70 billion each since 2021 when they only applied to the four quarters of the year. In 2022, there was an increase to $78 billion each, reflecting optimism as FHFA monitored the impacts of COVID-19. However, as the market started to decline, the caps for 2023 were slightly reduced to $75 billion each. Despite the decrease in caps, the exclusion of workforce housing suggests that FHFA predicts a rise in total lending activity, considering the expected volume of workforce housing transactions.
Expected Expansion in Transaction Volume
A potential for increased activity in the real estate market is expected during 2024. Here are some notes:
- Due to the frequency of short-term, floating-rate debt used to finance numerous multifamily transactions between 2020 and 2022, these loans are still confronted with costly extensions of interest rate caps. Consequently, we expect an uptick in transaction volumes.
- Extended periods of interest rate volatility have contributed to a prolonged phase of investor price exploration. With the anticipation of interest rate expectations stabilizing, a narrowing of the bid-ask spread between buyers and sellers is expected, leading to an increase in transaction volume for 2024.
These two points and the expected decrease in interest rates to around the mid-4 percent range indicate that more lending activities might happen in 2024. Additionally, the Mortgage Bankers Association (MBA) has predicted that lending could go up by 26% compared to 2023, reaching a total of about $559 Billion for all types of assets in 2024. Within this total, they foresee a 19% increase in multifamily transactions, with an expected lending amount of $339 Billion for the year.
Freddie Mac’s latest report on the 2024 Multifamily Market Outlook supports these ideas: Although interest rates are expected to stay high in 2024, some stability in interest rates could encourage more lending in the multifamily sector for the year. With more stable interest rates, prices for properties and cap rates should also stabilize, making it easier for buyers and sellers to agree on property values and leading to more transactions. Despite short-term challenges in supply, the multifamily market is expected to remain strong in the long run due to housing shortages, high costs in the housing market for sale, and a new generation of renters entering the rental market.
Enforcement of Updated Radon Regulations
The updated radon testing standards for Fannie Mae and Freddie Mac multifamily loans became effective on June 30, 2023. Here are the primary alterations in FHFA’s revised radon testing policy:
- It mandates radon testing at multifamily enterprise-backed properties, irrespective of their location, with certain exemptions and deferrals permitted.
- This raises the mandatory testing from 10% to 25% of ground floor units, ensuring at least one test per building.
- Also, it limits the allowance for lost, faulty, or inaccessible tests to no more than 15%, with discretion granted to environmental professionals.
- It obliges environmental professionals or property representatives to inform tenants about radon testing procedures, including access and sampling condition requirements.
- It also offers additional guidance to lenders and environmental consultants regarding Enterprises’ radon standards, emphasizing compliance with state and local radon regulations.
Note that the revised policy allows an environmental professional to manage the radon testing procedure. FHFA continues to oversee the multifamily mortgage sector and has collaborated with the U.S. Environmental Protection Agency (EPA) to assess whether any modifications to these standards will be necessary in 2024.
New Data Collection Requirements Coming Soon
As the beta phase of Fannie Mae’s expanded data collection requirements for Property Condition Assessments (PCA) and Seismic Risk Assessments (SRA) draws to a close this month, the forthcoming announcement of updated requirements and the release of the revised standardization form are expected. Fannie Mae is exploring the inclusion of over 30 additional data points to be gathered alongside the PCA, and 3 with the SRA, aimed at capturing property characteristics primarily related to climate resilience. Presently, Fannie Mae’s resilience requirement requires solely a data collection initiative. The data will be gathered using a form entered by their data digitizer and will not be included in the PCA/SRA report. This shift towards ‘digital’ due diligence enables users to access, analyze, and utilize property data, facilitating faster and more informed decision-making processes.
Stay on Top of Market Conditions With BFPM
In 2024, multifamily investors can stay informed about current market dynamics and regulatory shifts by partnering with consultants like BFPM who are well-versed in multifamily transactions and lending platforms. Opting for a consultant providing comprehensive due diligence and valuation services ensures smoother transactions. Obtaining all necessary third-party reports from one provider saves time and guarantees uniform property data across reports, facilitating a more efficient process.
Contact us at BFPM for any further queries.
Trevor Henson
Trevor Henson is an experienced entrepreneur (10+ highly-successful start-ups) and property investor with a demonstrated history of building and leading teams in investment property management environments, maximizing returns for property owners, and optimizing properties through construction management and re-positioning. He…Learn more about how we can help. Customized solutions for large portfolios!