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Current Season: First Draft Live
Between economic whiplash, shifting policies and market volatility that changes by the hour, you need industry insights that cut through the noise. That's exactly why we're launching First Draft Live, a new weekly series that breaks down what's happening, why it matters and what you need to know to do better business.
Join us live on Bisnow.com every Friday at 12:30 PM ET / 9:30AM PT for conversations with the industry's sharpest minds discussing the week's most critical stories, or catch the replay right afterwards — here on your podcast app of choice.
Welcome to First Drive Live. It's Friday, September 12. I'm Mark Bonner Biznoz, editor in chief coming to you live from New York. Thank you to so many of you for tuning in.
Mark Bonner:You know, every week, thousands of you join us here and on this podcast to catch the big real estate conversation shaping the market. But here's what you may not know. First Draft Live is a spin off of our daily newsletter, the First Draft. If you aren't subscribed yet, you should be. Of course, the inside track isn't free, but it's close.
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Mark Bonner:Head to biznow.com/firstdraft. That's biznow.com/firstdraft. Okay, Let's get into today's story. Multifamily staring down $250,000,000,000 in maturities next year. Loans rewritten to three to 4% now have to refi at six to 7%.
Mark Bonner:That's a 20 to 30% equity gap and mesh shops are already swamped. Some owners will re up, others will hand back the keys. Now enter the Fed, which steps in once more next week. A quarter point cut, 50 basis points. It would be the first since last December.
Mark Bonner:It may ease this thing, but it won't fix coverage ratios or stop values from sliding. Meanwhile, in Washington, they're reshuffling the deck again. A $30,000,000,000 IPO could push Fannie and Freddie towards privatization and the housing bill doubled GSE gaps for LITEQ to $2,000,000,000 each. That will channel more equity into affordable deals, Helpful, but maybe not enough to study the conventional market. When you put it all together, deal flow down 40% year over year, distressed trades 15 to 25% off peak, and $200,000,000,000 in dry powder waiting for a reset.
Mark Bonner:That's the 2025 setup. Unstable, uneven and wide open for those willing to move, which makes today the perfect moment to bring in Sharon Carafa, President of Multifamily Debt Instructured Finance at Newmark. She'll take us inside where capital is flowing, where cracks are spreading, and how the next year could redraw the multifamily map. Send your questions in the chat. We'll get to as many as we can.
Mark Bonner:Sharon, welcome to First Draft Live.
Sharon Karaffa:Thank you. Thanks, Mark, for having me. I'm excited for our chat and looking forward to the conversation.
Mark Bonner:So next week, we've got a big moment on the economic calendar. September 17, Jerome Powell is gonna come out and he's gonna make a decision. Could be 25 basis points. Some people think it's 50. I think it's highly unlikely that it's not nothing.
Mark Bonner:But Sharon, assuming that we do get a cut, how meaningful of a moment will that be for you given what you oversee at Newmark?
Sharon Karaffa:Yeah. So I think that, we've been we've been looking for interest rate cuts and and the market has been looking for rates to come down. I think for the most part, it's built in to, the ten year treasury already. So much of the debt, that we do is based on the longer end of the curve. Might we see more variable rate business get done?
Sharon Karaffa:Sure. But for the most part, the ten year treasury tends to track expectations, for future economic conditions and future Fed policy. And so I think it's built in. Essentially, lower rates are helpful for sure across the board, but market fundamentals are also gonna help kind of continue the continuation of improvement in market fundamentals will help us drive through some of the complexities that you mentioned.
Mark Bonner:The industry and Wall Street have been screaming for this for a long time. The president of The United States has been screaming for this for a long time. This is a highly politicized decision whether we like it or not. Is it overhyped? I mean, does this really move the market for you, Sharon, if we get this 25 or 50 basis point reduction?
Sharon Karaffa:I do think it I think generally it does help trigger some more transaction volume. But again, I think our our clients and I think the investors in the multifamily market, have have built in this expectation.
Mark Bonner:Okay. Listen. Debt service coverage ratios that worked in 2021 are no longer penciling, as you know. Mezzanine letters are already fielding more rescue capital request. We set this up in the intro.
Mark Bonner:How many of these maturities do you expect to fail at the refi stage?
Sharon Karaffa:Yeah. So I think that we're going to see some distress for sure. I'm not sure how much failure we'll see. Regarding the maturing book in 2025, you know, our research team has sliced and diced this a thousand different ways. And I think it won't be as bad as some may have feared, and it won't be as bad as we initially expected.
Sharon Karaffa:And I think it's important to take a look at, when these loans were originated and who originated them. So if we look at the vintage of the maturing loans this year, 40% of them were originated between 2016 and 2021. So all the deals before 2016, you can sort of assume they've had enough growth that they'll be able to weather higher interest rates in a refinance. Anything originated 2022 and beyond maybe has an extension option in there. So we're really talking about maybe 40% of that number.
Sharon Karaffa:And then you need to think about, who, originated the loans. An MBA report came out earlier this week that showed SDQs ticking upward for multifamily, but the real issues appear to be in the CMBS book. So 10% of what's maturing this year was originated by CMBS. 70% was banks and debt funds. And so what we've seen in the bank and debt fund space is that, banks, particularly for relationship borrowers and debt funds for sure, have been working with borrowers to either extend loans or modify loans, oftentimes looking for some sort of capital infusion from the borrower.
Sharon Karaffa:But with that, we've been able to see banks kind of work through issues with borrowers. There is a chunk of loans in that 70% that has already been extended once. So perhaps we may see some distress there. Our research team has estimated that 25% of those loans this year may see some distress, not necessarily expected to fail, but perhaps may be distressed.
Mark Bonner:Look, can rescue capital and mezz fill that gap? If so, how?
Sharon Karaffa:Yeah. So I think we're seeing some rescue capital and mezz for sure. There's a lot of liquidity in the market. But again, these modifications and extensions have been helpful as well. We are seeing borrowers continue to feed properties where that's helpful and necessary.
Sharon Karaffa:We haven't seen multifamily owners handing back keys. If we look past 2025 and start to think about maturities between now and 2027, and we look at the data that's available publicly through securitized loans, we think that a little bit more than half of it is operating below at or below a one o debt cover. So for that subset of loans, it will be difficult for those to cover higher debt costs, and we'll need to see continued property fundamentals improve to help those properties at the time of maturity or refinance.
Mark Bonner:Meanwhile, FHFA is preparing a potential $30,000,000,000 IPO of Fannie Mae and Freddie Mac, signaling a real push toward private privatization. At the same time, political opposition is heating up. Some lawmakers warning this move could destabilize the house the housing finance system. If Fannie and Freddie are privatized, how quickly would liquidity drive for multifamily borrowers, Sharon?
Sharon Karaffa:So a 30,000,000,000 IPO would be the largest IPO in the history of IPOs. So that's sort of one thing to keep in mind. I don't see a scenario where liquidity and multifamily dries up. There's a lot of private capital in this space. So on average, the GSEs account for 40% of financing, but that could be more in times, and that could be less in times.
Sharon Karaffa:Private capital tends to come in as needed, but there could be some degree of disruption caused by GSE reform, and that depends on the method in which the GSEs are privatized. I do think there's a lot of smart people in the room trying to figure this out, so I'm not expecting it to be catastrophic. But there could be some uncertainty when change first occurs. I don't think we'll see significant disruption. But if we can go back a minute and just talk about conservatorship and how we got to where we are, The GSEs were placed in conservatorship in 02/2008.
Sharon Karaffa:They've been there for seventeen years. That's like almost a full grown adult, which we talked about. I know because I was on maternity leave at that time. I had my son. We just celebrated his seventeenth birthday.
Sharon Karaffa:So here we are. It was never intended to be this long. It was never intended to be forever. So we do need to find a way to get to the other side. And was created initially chartered by Congress to promote affordable homeownership in The US.
Sharon Karaffa:And then Freddie was created with a similar mission to offer competition. And that competition is very good and very healthy for home buyers, for apartment owners, and for renters. The competition is critical. At the end of 02/2008, when they were put in conservatorship, they entered into an agreement with Treasury. And for the next four years, they drew about $190,000,000,000 from Treasury.
Sharon Karaffa:During that time, the multifamily divisions of both Fannie Mae and Freddie Mac were profitable. So that's interesting to kind of file away. In 2012, so four years in, they since began to be profitable again and began paying dividends to the treasury. And from that time until 2019, the treasury swept all net worth. So essentially 300,000,000,000.
Sharon Karaffa:So 190 drew or borrowed and 300,000,000,000 went back to the treasury. At that time, that was the you know, there's there's been talks of GSE reform since 02/2008. But at that time, it was decided that there could never be privatization of the agencies if they had no capital. So they were allowed to start accumulating capital. They're still shy of the required capital that's established for them by FHFA.
Sharon Karaffa:And it's anticipated that if they continue perform at the level that they have and expect to, they'll reach full capitalization in 2027 or 2028. So we're getting closer, but they still don't have those capital reserves, banked yet. So we're still a few years away.
Mark Bonner:We a very different type of individual who lives at 1600 Pennsylvania Avenue these days, right? I agree with you that the 30,000,000,000 IPO is fantastical, okay? But what's the most realistic scenario that you see, Sharon, here? I mean, are we talking about continued status quo, partial privatization, or a full handoff to private capital? Something's gotta give here.
Mark Bonner:Right? The president, once he puts his eye on something, he does not look away.
Sharon Karaffa:Yeah. And there's a path to getting there for sure, and I and I do believe we will get there. I think it will be something in the middle, something partial. As I mentioned, the GSEs haven't received their cap haven't achieved their capital requirements yet. And some actions to to take private can be triggered by the executive branch.
Sharon Karaffa:A lot will involve congress. So I do think something in the middle is is where we'll land, but there's a few things that I think are really critical and a few ideas that have been floated that I do think could be detrimental. So the things that I think are most critical is the line to treasury. So you need to maintain that line to treasury. That's an historically been an implied or an explicit government guarantee.
Sharon Karaffa:That's what allows Fannie and Freddie to trade their securities at triple a levels, and that's needed to maintain and achieve affordability in the housing market. Then you need a very strong regulatory framework that ensures confidence and financial soundness so that we don't get into a mess like we did in 2008 again. And then I think lastly, the agencies, particularly in multifamily, have very different models. And I touched on how they did not have losses from 2008 to 2012. There's several factors contributing to that, but one of them is that they, transfer risk.
Sharon Karaffa:And in the Fannie Mae model, they rely on their delegated lenders to share in the loss sharing and share in the credit risk. And in the Freddie Mac model, they sell, they aggregate and securitize and sell B pieces. And so they've got private equity involved in the financial risk of their transactions. The two platforms are needed. And there's been discussion of combining the agencies.
Sharon Karaffa:The market needs the competition. A monopoly is not great for innovation. Competition drives better products and terms and pricing for market participants, and it diversifies risks. So I think we can find a way to get there. It will take time.
Sharon Karaffa:We need to be thoughtful about multifamily, the impact to multifamily. One third of every American is a renter. So we need to be thoughtful when we solve this GSE problem for single family. We're considering multifamily as well, and do it in a way that maintains affordability and stability and liquidity to the market.
Mark Bonner:If you're just joining us, this is First Draft Live. We're unpacking multifamily's refinancing crunch and policy shakeups with Sharon Carafa, president of multifamily debt and structured finance at Newmark. Let's talk one big beautiful bill. It just expanded the LITECH program. FHFA also doubled GSE investment caps in LITECH properties from 1,000,000,000 to 2,000,000,000 annually, each for Fannie and Freddie, with at least half directed to the hardest to serve markets.
Mark Bonner:Sharon, how much new equity do you expect these new LITEC reforms to actually unleash into the market over the next twelve months?
Sharon Karaffa:Yeah, I think, the LITEC program is arguably one of the most powerful tools that the US government has in support of new supply and preservation of affordable housing. It's especially powerful because it's a public private partnership, which is a demonstrated successful model. The reforms to the LITECH program essentially extend and expand the program and then also make them permanent, which provides more predictability to developers over the long term. It's a great step forward in addressing the affordable housing challenges that we have in our country today. The increase in LITEC allocations, we think will result in the production or preservation of over 1,000,000, 1.2 in additional affordable rental units.
Sharon Karaffa:That's over the next decade. But we're already starting to see states make policy changes to effectuate the new program. You also mentioned FHFA increased the amount of equity that each GSE can invest in LITECH. Fannie and Freddie had to exit the LITECH equity market in 2008 when they went into conservatorship. And for years, they were kind of placed to the side.
Sharon Karaffa:But in an effort to support affordable housing, and complement their duties to serve program, which essentially requires them to serve underserved markets, they've been able to reenter the market. So they started with 500,000,000 each and then bumped to 1,000,000,000. And now with this change, as you mentioned, it gets to 2,000,000,000. So this is a meaningful infusion of equity into the market, unlocking 4,000,000,000 of equity capital for affordable housing projects. At least half of that expanded investment, directed toward underserved markets.
Mark Bonner:So you don't think it's going be a drop in the bucket?
Sharon Karaffa:I don't think it's a drop in the bucket for affordable housing. I think any supply is great. We need more supply. So this will certainly trigger additional supply of affordable housing, and particularly in areas that have been underserved by traditional investment channels. I don't think it's likely to significantly impact the dynamic in the conventional multifamily market, but I think additional supply is needed and certainly will help.
Sharon Karaffa:We still need more, but it's a great step forward.
Mark Bonner:FHFA has kept twenty twenty five multifamily loan purchase caps at 73,000,000,000, each for Fannie and Freddie with 50% mission driven allocations. Banks remain cautious. Debt funds are circling. Private lenders are cherry picking only the strongest sponsors. Deal volume this year has fallen by more than 40% year over year.
Mark Bonner:Which lenders are actually closing deals right now?
Sharon Karaffa:We we are seeing a tremendous amount of interest and lending kind of across the board. The GSEs still are really the backbone in multifamily lending right now. In fact, they haven't released their August numbers, but through July, Fannie Mae is up 44%. Freddie Mac is up 23 and a half percent. So we're not seeing a slowdown in the GSE space at all.
Sharon Karaffa:In fact, for the first time in several years, the agencies are managing to their caps again and expecting to come close to their caps and trying hard to reach their caps. Additionally, you mentioned 73,000,000,000 for each Fannie and Freddie, but there is some affordable programs that they lend on that can be exempt from those numbers. So theoretically, they could do more business this year than they've been able to do previously. And I know that they try really hard and they focus on those products as well. Further, if they ever needed additional capital, they do have a direct line to FHFA.
Sharon Karaffa:The director of FHFA is the chair of each of the board. And so there's certainly channels for them to request additional capacity if they need it. But we are finding Fannie and Freddie to be really aggressive right now. They're working hard to be creative and innovative. Our Newmark's Fannie and Freddie business is up over 35% year over year.
Sharon Karaffa:We're seeing them lean into stabilized, like near stabilized properties, trying to help banks by refinancing construction loans earlier into permanent loans. They're leaning into structured products, which offer borrowers flexibility, in return for crossing assets. So they they both have a desire to innovate, a desire to do more business, and to to achieve their caps. In our book, we're also seeing, more business from debt funds and banks. So we're actually seeing, lenders across the board continue to be active.
Mark Bonner:Sure. And I know you travel the country a lot. I mean, are you seeing regional hotspots where financing is still flowing? Like where on the map are you excited about right now?
Sharon Karaffa:So we see financing flowing across the country in every market. Gateway markets have remained especially liquid, New York, LA, Chicago, Dallas, New Jersey. So we're seeing a lot in gateway markets, a lot of liquidity. And I would say there's more markets than that aren't that are getting a lot of liquidity. The the markets that maybe lenders were seeing be a little bit more cautious or perhaps a little bit more conservative would be in those markets where there's been a lot of new supply that is recently having recently been delivered.
Mark Bonner:Okay, let's go to a question from the audience. Thirty year mortgage just dropped down to 6.3% and is probably going to keep going down. Where does it have to be to start taking demand back away from rental multifamily? And is that a concern at all for apartment investors?
Sharon Karaffa:That's one factor for sure. And when we look at our analysis of the cost to be a homeowner and the cost to be a renter, currently it's still $1,200 a month more expensive to be a homeowner than a renter. So that is one factor, but we're also seeing, you know, the generation that is currently renting, wanting to be renting and being a little bit more transitory. So that's one factor. It's not the only factor, but yes, it's one piece of information that we watch.
Sharon Karaffa:But we think, the demand for multifamily continues. And so yes, one factor as one of many.
Mark Bonner:You know, I've been talking to a couple of my reporters this week in anticipation of our conversation and, you know, they're starting to see distressed trades hit. Discounts of 15 to 25%, well below peak pricing in some metros. Delinquencies are creeping up. Services are beating the test loan sales. The big question is whether these deals will set a new baseline for valuations.
Mark Bonner:And to that end, do you think we're at the start of true price discovery or are we still in that denial phase?
Sharon Karaffa:Yeah. I think we're past denial. I think we're solidly in
Mark Bonner:That's good.
Sharon Karaffa:Yeah. That's good. I think we're past it. I think we're also and yes, with each trade, we're setting new benchmarks, but I think we're on the upswing. And I think investors in multifamily over the last few years have had to get comfortable with volatility and uncertainty, and it's kind of come down to how motivator how motivated is an investor to transact.
Sharon Karaffa:Our sales volume is up year over year. The fundamentals in multifamily are strong. Supply has been absorbed. Absorption has been very high. Vacancies are low.
Sharon Karaffa:Much of the new supply wave is behind us. So we think that, we're kind of on the upswing and seeing a lot of activity in the sales market and a lot of BOV activity throughout the country.
Mark Bonner:So, I I don't wanna put words in your mouth, but do you expect to see more of these distressed sales accelerate in the next six months as we get even more used to this new normal, this new time of uncertainty that seems like it's going to be with us for many years? Or do you think lenders are going to drag this out?
Sharon Karaffa:Yeah. I think we were really fearful in anticipating the huge supply coming online over the last few years. I think we were fearful with the the, you know, significant amount of variable rate financing that borrowers are having to deal with when rates reset. But we've seen it sort of work itself out. Distress has really only marginally materialized.
Sharon Karaffa:So we're not anticipating a large amount of distressed sales to accelerate. I think along the edges, we will see some. I think lenders will continue to work with borrowers, but I think more than that, the high absorption, the low vacancy We'll continue to improve the fundamentals. We'll start to see more rent growth, combine that with some lower rates, and we'll be back.
Mark Bonner:Look, as we discussed earlier before the show got started, 2025 is bringing a collision of forces, right? Record maturities, Washington policy shifts and everything that comes with that affordability pressures in nearly every Metro in the Lower 48. At the same time, there's this $200,000,000,000 in dry powder just sitting on the sidelines waiting for clarity. So, Sharon, when you look at all of that, what's the single biggest risk to multifamily financing over the next year?
Sharon Karaffa:Yeah. For a long time, I thought interest rate volatility was the biggest problem. Like, it was just bouncing around and we we just wanted stability. I think we got comfortable with that volatility and with that interest rate uncertainty. Now I think it's rent growth.
Sharon Karaffa:So we talked about vacancy rates being low. We need to see that rent growth to really help us. We talked about some of the loans that are coming due operating below a one o debt cover. We need the pop in rent growth to kind of climb out of some of the potential distress that could be coming our way.
Mark Bonner:We got a lot of insiders on on the on the show right now listening for this next one, Sharon. What's the biggest real opportunity for investors who have the stomach to move right now?
Sharon Karaffa:I think there's tremendous opportunity for longer term hold strategies in really good markets with strong fundamentals. So despite the supply in the Sunbelt markets, demographics are great there. Long term outlook is strong. So if you can get comfortable with a little bit of short term negative leverage for long term success, particularly investments perhaps in new construction assets, I think there's some opportunity there.
Mark Bonner:If you could tell policymakers in Washington one thing not to screw up this year, what would it be?
Sharon Karaffa:It would be GSE reform. So I do, as I mentioned, I think the risk is low because as I said, we've got a lot of very smart people in the room. But depending on the path to GSE reform, we could see real instability. So my hope is and my ask is to listen to the experts, to take comments, to think about multifamily in conjunction to the single family solution to GSE reform, and do it in a thoughtful way.
Mark Bonner:Sharon, I really appreciate you being here. Good luck to your son tonight in his big football game in Northern Virginia. Thank you very much.
Sharon Karaffa:Thank you. Thanks for having me.
Mark Bonner:If you missed any part of this episode or want to dive into our earlier conversations, every show is up right now on your favorite podcast app. Just search First Live. We'll be back next Friday with another look at how the biggest forces in the economy are colliding with commercial real estate. I'm Mark Bonner. This is First Draft Live.
Mark Bonner:Have a great weekend, y'all.