Who do billionaires turn to when they want to buy apartment complexes? The American taxpayer.
Barry Sternlicht’s Starwood Capital Group and Stephen Schwarzman’s Blackstone Group LP are in talks with Freddie Mac to fund two deals totaling more than $ 10 billion, according to people familiar with the negotiations. These talks come after the government-owned mortgage giant has already agreed to back $ 7.6 billion from Lone Star Funds case to buy Home Properties Inc. and Brookfield Asset Management Inc. invest $ 2.5 billion to resume of Associated Estates Realty Corp.
The mortgage guarantor – who, along with his larger counterpart Fannie Mae, was rescued as part of a $ 187.5 billion taxpayer bailout in 2008 – is increasing its multi-family lending as its regulator eases restrictions on this part of its activity. The cheap debt of US-backed companies is helping to keep the value of apartment buildings rising over five years and is fueling some of the biggest real estate deals since the financial crisis.
“They’re wielding a really big stick,” said John Levy, director of a real estate investment bank in Richmond, Virginia, which bears his name. “It’s taking longer and going to be more expensive” to do deals without the two companies, which can lend at extremely low rates because their deals have the implicit backing of the government.
The purchase of apartment buildings in the United States has been a winning bet for several years as rents increase in a context of abandonment of homeownership. This is attracting investors such as Starwood, which said on October 26 it had agreed to purchase 72 rental communities across the country from Equity Residential for $ 5.4 billion. The announcement came just days after Blackstone hit a $ 5.3 billion deal to buy Stuyvesant Town-Peter Cooper Village, Manhattan’s largest apartment complex.
Freddie Mac’s deals get bigger as his regulator broadens the definition of affordable housing, allowing the company to make more loans. Properties deemed affordable by the Federal Housing Finance Agency are exempt from a $ 30 billion cap that limits the amount that government-sponsored entities can lend to apartment owners each year.
“We’re helping put more capital into this part of the multi-family,” said David Brickman, manager of multi-family operations at Freddie Mac, based in McLean, Virginia. “A very small percentage of what we do is luxury.”
Freddie Mac provided $ 34.1 billion for multi-family acquisitions and refinancing this year through September, more than double the $ 14.1 billion for the same period in 2014.
City of Stuyvesant
In Stuyvesant Town, home to around 30,000 New Yorkers and one of the last bastions of affordable housing in Manhattan, Blackstone made a deal with the city to protect residents from soaring rents. The New York-based private equity firm and its transaction partner, Canadian investor Ivanhoé Cambridge Inc., have agreed to keep about half of the more than 11,000 affordable units for 20 years.
The relatively cheap funding provided by Fannie Mae and Freddie Mac makes large debts for projects like Stuyvesant Town more manageable. Interest rates on agency mortgages can be less than 3%, compared to Wall Street banks’ average financing costs of 4.5%, according to Richard Hill, analyst at Morgan Stanley.
Aside from government-sponsored companies, few lenders have the capacity to finance a purchase as large as Blackstone’s, according to Sam Chandan, president of Chandan Economics, a provider of real estate data and analysis.
“You could make a compelling case that the deal would not be done in its current form without funding from an agency in the market,” he said.
Freddie Mac gave Lone Star his biggest apartment loan, a $ 5 billion mortgage to fund the private equity firm’s buyout of Home Properties. More than 30 percent of that deal met FHFA’s affordable housing guidelines, Brickman said.
Dallas-based Lone Star, founded by billionaire John Grayken, said in June that the acquisition of Home Properties – with 121 communities, mostly along the East Coast – was in line with its resort-buying strategy of second-level apartments, such as housing for the workforce. , rather than expensive newly built properties.
Representatives for Blackstone, Lone Star and Starwood declined to comment on their fundraising strategies.
Fears of bubbles
According to Moody’s Investors Service and Real Capital Analytics Inc., prices for multi-family properties in the United States are 33% higher than they were at the previous high in 2007, a jump fueled in part by abundant financing from Fannie Mae and Freddie Mac. This raised concerns that a bubble would form which could burst when interest rate increase, according to Levy, the investment banker. Taxpayers could be held liable for losses incurred by mortgage companies if apartment values were to drop sharply.
The losses that pushed Fannie Mae and Freddie Mac to the brink of insolvency seven years ago came from companies’ single-family home portfolios, which eclipse their apartment holdings. The multi-family segment of their businesses emerged relatively unscathed from the financial crisis and remained profitable during the recession.
At Freddie Mac, private investors would bear about the top 15% of losses on multi-family transactions, providing a cushion in the event that building values fall, Brickman said.
“It would be extremely unlikely that we would ever be called upon to back our guarantee,” he said. “We stand by our principles and endorse cautiously. “
Critics argue that providing subsidized loans to real estate investors with sizable pockets is not in line with the mandate of government-sponsored entities.
“If the purpose of GSEs is to provide liquidity to the secondary mortgage market, in order to promote home ownership, it seems inappropriate to focus on financing multi-family rental properties,” said Josh Rosner, analyst at research firm Graham Fisher & Co. said in an email. “This approach only serves to deliver a public subsidy to private actors.
Brickman said Freddie Mac does not see his business through the prism of the institutions to which he lends.
“We are focused on supporting housing for middle-income people and the workforce,” he said. “Who owns it is somewhat irrelevant. “
Fannie Mae, who was not involved in the biggest multi-family deals of the year, said she assesses each funding request on its terms.
The company “is committed to providing essential financing for multi-family housing in all markets,” Andrew Wilson, spokesperson for Washington-based Fannie Mae, said in an emailed statement. “We have done this throughout the year, striving to efficiently maintain our business and meet rental housing needs.
The real power of Fannie Mae and Freddie Mac is that they continue to lend in times of trouble, according to Warren Friend, executive managing director of Situs, a commercial real estate consultancy. They kept the multi-family market buzzing during the height of the recession in 2009, he said.
“What they provide is that stability when everyone else is shutting down,” he said.