The State of the Small Balance Multifamily Market: Q&A – Part 2A

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Arbor has helped shape the small multifamily loan market into what it is today, partnering with Fannie Mae to develop the first-ever agency small loan program over 20 years ago. More recently, Arbor helped develop the Freddie Mac Small Balance Loan program that launched in 2014 — and was the program’s top lender in 2015 and 2016.

Ivan Kaufman, Chairman, President & CEO of Arbor, recently sat down with Stephen Johnson, vice president of the Small Balance Loan business at Freddie Mac, for a conversation on the sector moderated by Sam Chandan, founder of Chandan Economics and the Silverstein Chair of the NYU SPS Schack Institute. Here is Part 2 of that conversation, which examines the role of small balance loans in the multifamily housing sector.

(The following is excerpted from the December 9, 2016 episode of The Real Estate Hour, a weekly SiriusXM Radio show powered by the Wharton School of Business. The text is edited for clarity and brevity. You can listen to the full show by clicking here. Part 1 of the Q&A is located here.)

Sam Chandan: Multifamily in the post-crisis period has sort of been defined by large buildings in the urban core. High rise, high amenity, high rent properties that target a Millennial audience in many cases. But small balance looks quite different. What is a small balance loan? What is the small balance market?

Ivan Kaufman: So typically, the way it’s defined, is that small multifamily loans are generally up to $5,000,000, for properties 5 to 50 units in size. What is important to note, is that it is really the fastest growing asset class in some of these secondary and gateway markets.

What is also interesting to note, is that the type of borrower is a little bit different. The borrowers are more local in nature, more entrepreneurial, less institutional and generally successful businesspeople who are doing one or two transactions.

So what Freddie Mac and Fannie Mae have been able to do is bring a standardized, consistent product and a lot of stability into these underserved areas of the market.

Sam Chandan: Steve, can you tell me a little bit about why Freddie Mac has made such a big push into this space over the last couple of years?

Steve Johnson: We started this program in the fall of 2014. We wanted to be in this business for a very long time. Previously this is something we had done — frankly — off the side of our desks. We were doing it fairly inefficiently, mainly supporting borrowers who were primarily interested in larger loans in the $15 million to $20 million range. So we knew there was a business there. Smaller properties are a huge part of the market, and we were unable to support it.

When we did get an opportunity to enter the sector and build a program, we threw ourselves completely into it. It became priority number one in our division, and we built an entire standalone business to support the small loan program. I am not sharing resources across the organization. We are our own business. That is a massive commitment, but it is something we believe in.

We could have easily made a mistake and built an additional liquidity product that didn’t sell. But by partnering with our expert sellers, we built a product that is designed for today’s market. This is evidenced by the results — $2.6 billion, 1,000+ loans and 11 securitizations in the first year alone.

Stay Tuned for Next’s Week Part 2B!

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Multifamily Building Permits

Multifamily Development Year-End 2016 | Arbor

Year-end data released by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development on new residential construction, including data for multifamily buildings (classified as structures with five or more units), showed that multifamily development continued its strong run during 2016.

Multifamily Building Permits

Authorizations of privately-owned residential housing units in the United States in buildings with five units or more were at a rate of 410,500 units at the end of 2016, down from 454,500 units at the end of 2015, and representing 35% of the total housing permits issued. The 2015 total was the highest year-end total since 656,600 units in 1987.