Welcome to the GSE Multifamily Forum Session Monday, June 8, 15 11:am 12:pm Astor Ballroom 7 th Floor, Marriott Marquis Incoming Chair: Eric Draeger, Berkshire Property Advisors Incoming Chair-Elect: Mitchell Kiffe, CBRE Outgoing Chair: Mitch Resnick, Freddie Mac
GSE Multifamily Forum Agenda I. Welcome and Introductions II. Chair-Elect Affirmation III. GSE Reform & Legislative Update Marty Schuh, CREFC IV. CRE Outlook, Multifamily Fundamentals, & Economic Overview Richard Hill, Morgan Stanley V. Market Panel Roundtable Discussion Moderator: Chris Callahan, Credit Suisse Eric Draeger, Berkshire Property Advisors Mitchell Kiffe, CBRE Mitch Resnick, Freddie Mac Joshua Seiff, Fannie Mae VI. Adjourn
Global Securitized Products Strategy A Golden Age for Multifamily M O R G A N S T A N L E Y R E S E A R C H North America Morgan Stanley & Co. LLC Richard Hill Richard.Hill1@morganstanley.com +1 212 761 98 Jerry Chen Jerry.Chen@morganstanley.com +1 212 761 8591 Due to the nature of the fixed income market, the issuers or bonds of the issuers recommended or discussed in this report may not be continuously followed. Accordingly, investors must regard this report as providing stand-alone analysis and should not expect continuing analysis or additional reports relating to such issuers or bonds of the issuers. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.
A Golden Age for Multifamily In our 15 CRE Debt Outlook, we articulated the view that GSE lending will accelerate in 15, given increasing demand for rental properties as the home ownership rate has fallen to 6, the lowest level since 1Q95. At the same time, the FHFA has affirmed that the GSEs have a critical ongoing role in the multifamily sector with a strategic goal to maintain market liquidity, rather than shrinking their footprint. This is creating what David Brickman (Executive Vice President for the Multifamily Business at Freddie Mac) described as a golden age for multifamily that will not be ending anytime soon. Agency CMBS are guaranteed by the US government or one of the Government Sponsored Enterprises (GSEs). The underlying CRE assets are primarily multifamily properties, but may also include healthcare properties as well as small business owners with public policy goals such as affordable housing and community development. We see opportunities across Freddie K deals, FNMA DUS loans and GNMA project loans, with each product offering unique opportunities and risks. The inclusion of CMBS issued and backed by Fannie Mae and Freddie Mac Barclays US Aggregate and Global Aggregate Indices as of June, 14 may be a further tailwind as it improves the depth and breadth of demand for these bonds in both the primary and secondary markets, in our view. Furthermore, the implementation of LCR rules may increase bank demand for these products. Source: Ginnie Mae, Fannie Mae, Freddie Mac, Bloomberg, Morgan Stanley Research
Agency CMBS Overview Freddie Mac K Deals Fannie Mae DUS Megas Fannie Mae DUS REMICs (ACES) Ginnie Mae Project Loan REMICs Bloomberg FREMF FN FNA GNR Multi-tranche Single-tranche Multi-tranche Multi-tranche Structure Sequential (Fixed) / Pro-Rata (Floating) Pass-Through Sequential Sequential Credit Enhancement No Credit Enhancement No Credit Enhancement No Credit Enhancement Loan Origination Process Freddie Mac Multifamily sources its loans from a select group of experienced multifamily lenders. Underwriting and credit reviews are completed by Freddie Mac, and CME loans are underwritten to the same standards as loans held in Freddie Mac s portfolio. Approved lenders may underwrite, close and sell loans on multifamily properties to Fannie Mae without prior Fannie Mae review. DUS stands for Delegated Underwriting Servicing, which are the origination and servicing guidelines for Fannie Mae s multifamily lending program. There are currently 24 DUS lenders that usually retain a risk position in the loans. The loans are underwritten by FHA-approved lenders, subject to minimum guidelines including LTV and DSCR Guarantor Guarantee Freddie Mac guarantee (senior classes) Freddie Ks guarantee the timely payment of interest and ultimately payment of principal on the guaranteed certificates. Fannie Mae guarantee Full recovery and timely payment of principal and interest. Yield maintenance payments are not guaranteed Full faith and credit of U.S. government The FHA guarantees ultimate payment of interest and principal on the loans while GNMA makes up for the inadequacies by guaranteeing both the timeliness of principal and interest payments and by paying the assignment fee in the event of a default. Pricing Assumptions CPR CPY: zero defaults and no prepayments after lockout 15% CPJ: 15% CPR after lockout and standard project loan default (PLD) curve. Source: Ginnie Mae, Fannie Mae, Freddie Mac, Bloomberg, Morgan Stanley Research
Apartments Lead the Rebound in CRE Fundamentals
Rental Demand Increases as Homeownership Rates Fall Credit availability (or lack thereof) is playing a role in people s inability to own homes. Homeownership Rates Have Fallen to 6 In our view, demand for rental properties is driven by fewer people who are willing and/or able to own homes. Indeed, after peaking at 69. in 4, the homeownership rate has fallen to 6, a rate we last saw in 2Q 1994. While we have seen credit standards ease on the margin, they are still at much tighter levels than they have been historically. Further, the lack of private capital in the housing finance market specifically with respect to the private-label MBS market has severely limited the amount of lending to tail borrowers at the lower end of the credit-score spectrum. In 6, mortgages in private-label securitization accounted for 36% of total originations. Today their share is only.5%. Credit availability is especially tight for first-time homebuyers. The Qualified Mortgage (QM) definition, a new regulation mandated by Dodd-Frank, has been effective since January, 14, and relies on the back-end debt-to-income ratio not exceeding 4. For the 25-34 age cohort, the typical age group for first-time homebuyers, high student loan balances further compound affordability and availability challenges. The large millennial generation is starting to reach the age groups where household formation usually peaks. According to the Joint Center for Housing Studies (JCHS) of Harvard University, millennials are expected to form 24 million new households between 15 and 25. Mortgage Credit Easing Slightly, but Lending to the Non-Prime Tail Remains Non-existent Source: Mortgage Bankers Association, Trepp, Morgan Stanley Research
Positive Lending Growth Multifamily & GSE Lending Volumes Remain High Change in Year-over-Year Originations Among investor types, the dollar volume of loans originated by the GSEs grew the most YoY, by 119%. Life insurance and CMBS conduit originations increased at a slower pace, by 8% and 6% respectively. Meanwhile, origination by commercial banks fell by 7%. On a YoY basis, loan origination rose the most in multifamily and industrial properties, by 39% and 2 respectively. Retail and hotel saw volumes grow by 16% and 1 respectively, while office only grew by and health care declined by 8%. Year-over-Year Lending Volumes Strongest in Multifamily and Industrial 5 % % % % -% -% Origination Volume Index (YoY) Multifamily Office Retail Industrial Hotel Healthcare 1% % 8 6 % % -% 7 6 5 1Q2 4Q2 Origination Volume Index (YoY) Origination Volume Index 3Q3 CMBS/Conduits Historical Origination Index by Origination Type 2Q4 1Q5 4Q5 3Q6 CMBS/Conduits Life Insurance Commercial Banks 2Q7 1Q8 4Q8 3Q9 2Q Life Insurance 1Q11 4Q11 3Q12 2Q13 Commercial Banks Fannie/Freddie Fannie/Freddie 1Q14 4Q14 Source: MBA Survey of Commercial / Multifamily Originations, Morgan Stanley Research
Property Prices: Commercial vs. Housing Recovery CRE Recovery Further Outpacing Housing Recovery The Moody's / RCA Commercial Property Price Index (CPPI) shows that the National All-Property composite increased by 15.9% YoY in February, still outpacing the price appreciation in housing. The S&P / Case-Shiller Composite- City Home Price Index (Case-Shiller), which is reported on a greater lag, increased by 4.6% YoY in January. In terms of indexed prices, the National All-Property CPPI has now recovered 117. of its 7-8 peak-to-trough losses. This is substantially more than the amount Case-Shiller has recovered, 53.7%. Despite some signs of normalization in price appreciation of Commercial and Housing earlier in 14, the recovery in CRE has since decoupled to again outpace housing. Case-Shiller, CPPI: Indexed Price 2 19 17 15 1 1 9 (Indexed Price 2=) Peak-to-Trough Housing: -35% Commercial: -% Recovered Housing: 5 Commercial: 117% Jan-2 Aug-2 Mar-3 Oct-3 May-4 Dec-4 Jul-5 Feb-6 Sep-6 Apr-7 Nov-7 Jun-8 Jan-9 Aug-9 Mar- Oct- May-11 Dec-11 Jul-12 Feb-13 Sep-13 Apr-14 Nov-14 Case-Shiller, CPPI: YoY Change - - - - (YoY %) Jan-2 Aug-2 Mar-3 Oct-3 May-4 Dec-4 Jul-5 Feb-6 Sep-6 Apr-7 Nov-7 Jun-8 Jan-9 Aug-9 Mar- Oct- May-11 Dec-11 Jul-12 Feb-13 Sep-13 Apr-14 Nov-14 S&P/Case-Shiller CPPI S&P/Case-Shiller CPPI Note: S&P/Case-Shiller data are reported on a lag to CPPI data Source: Moody s / RCA, S&P/Case-Shiller, Morgan Stanley Research
Apartment Leading the Recovery in Prices Major Markets Price Appreciation Continue to Outpace Non-Major Markets Major markets have recovered 155.7% of their peak-to-trough losses, while non-major markets have recovered only 88. of theirs. Major market prices grew 16.7% in February YoY,.4 percentage points faster than the prior month. Meanwhile non-major market prices increased by 15. YoY,.8 percentage points faster than the previous month. Out of the main property types, apartment prices have recovered the most since the crisis, recouping 167.7% of peak-to-trough losses, while retail and industrial have recouped the least (78.9% and 94.8%, respectively). The subsectors with the fastest YoY price growth are major market industrial and non-major market suburban office, 24. and 18.6% respectively. This contrasts with major-market retail, which saw prices grow by only 3. YoY. Note: Major and Non-Major market breakouts of each property sector are quarterly data, all else is monthly. Peaks are pre-crisis (7-8), troughs are post-crisis (9-). Hotel indices less comparable to other sectors due to data differences. Source: Moody s / RCA, Morgan Stanley Research
1 % 9% 8% 7% 6% 5% Overall Cap Rates Fell to 6.4 in February, And All Sectors Risk Premiums Are Still Above Historical Averages yr UST Spread (bp, right) B ottom 25% Median 75% Top United S tates 13.5 7.6 6.8 5.95% 2. North America 13.5 7.6 6.8 5.95% 1.59% Note: Data based on past 12 months Historical Cap Rates 1 % 9% 8% 7% 6% 5% yr UST All Property Types Spread (bp, right) Cap Rate Spread Avg (bp, right) 7 6 5 '1 '3 '5 '7 '9 '11 '13 '15 Office Apartment Hotel Industrial Cap Rate Spread Avg (bp, right) 7 6 5 '1 '3 '5 '7 '9 '11 '13 '15 1 % 9% 8% 7% 6% 5% yr UST Spread (bp, right) Cap Rate Spread Avg (bp, right) 7 6 5 '1 '3 '5 '7 '9 '11 '13 '15 1 % 9% 8% 7% 6% 5% yr UST Spread (bp, right) Cap Rate Spread Avg (bp, right) 7 6 5 '5 '7 '9 '11 '13 '15 1 % 9% 8% 7% 6% 5% yr UST Spread (bp, right) Retail Cap Rate Spread Avg (bp, right) 7 6 5 '1 '3 '5 '7 '9 '11 '13 '15 1 % 9% 8% 7% 6% 5% yr UST Spread (bp, right) Cap Rate Spread Avg (bp, right) 7 6 5 '1 '3 '5 '7 '9 '11 '13 '15 Note: UST y is nominal y constant-maturity Treasury. Cap rates are 3m rolling average. Reported on a 1-month lag. Includes appraised values in addition to repeat sales, excludes portfolio sales. Source: Real Capital Analytics, Morgan Stanley Research
Apartments Leading the Rebound in NOI Growth Apartment 115 8% Office 4 1 6% 2 5 95-98 96 94 - - 9-92 -6% 85-6% 9-8% 1Q3 3Q3 1Q4 3Q4 1Q5 3Q5 1Q6 3Q6 1Q7 3Q7 1Q8 3Q8 1Q9 3Q9 1Q 3Q 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q3 3Q3 1Q4 3Q4 1Q5 3Q5 1Q6 3Q6 1Q7 3Q7 1Q8 3Q8 1Q9 3Q9 1Q 3Q 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 NOI Index Change (YoY, right) NOI Index Change (YoY, right) Retail Warehouse 1 99 97 95 93 91 89 87 5% - - - - -5% 3 1 99 97 95 93 91 89 87 - - - - -5% 1Q3 3Q3 1Q4 3Q4 1Q5 3Q5 1Q6 3Q6 1Q7 3Q7 1Q8 3Q8 1Q9 3Q9 1Q 3Q 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q3 3Q3 1Q4 3Q4 1Q5 3Q5 1Q6 3Q6 1Q7 3Q7 1Q8 3Q8 1Q9 3Q9 1Q 3Q 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 NOI Index Change (YoY, right) NOI Index Change (YoY, right) Source: PPR, Morgan Stanley Research
Major Market Historical Rents Multifamily rents grew 3.6% YoY in 4Q14 and have moved higher over the past several years due to a combination of a relatively limited new supply of properties and increased demand for rentals as home ownership declined. Office rents have also trended higher, with recent year-overyear growth of approximately 3., and are currently 3.5% below the 8 peak. Retail has lagged, with rents only starting to meaningfully increase in and now growing at a pace of 2. YoY. Effective Rent: Retail 17.8 17.6 17.4 17.2 17. 16.8 16.6 16.4 16.2 Mar-7 Aug-7 Jan-8 Jun-8 Nov-8 Apr-9 Sep-9 Feb- Jul- Dec- May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 as Effective Rents Increase Nov-13 Apr-14 Sep-14 - - - - Effective Rent: Multifamily 117 11 7 97 9 25.5 25. 24.5 24. 23.5 23. 22.5 22. 21.5 Mar-7 Aug-7 Jan-8 Jun-8 Nov-8 Apr-9 Sep-9 Feb- Jul- Dec- May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Rent ($) Effective Rent: Office Rent (YoY %, right) Mar-7 Aug-7 Jan-8 Jun-8 Nov-8 Apr-9 Sep-9 Feb- Jul- Dec- May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 5% - - - - 1 % 8% 6% - - -6% -8% -% Rent ($) Rent (YoY %, right) Rent ($) Rent (YoY %, right) Source: REIS, Morgan Stanley Research
Major Market Supply, Vacancies, Net Absorptions New Supply Picking Up in Multifamily The new supply of properties remains well below the 7 peak for all property types. Multifamily completions are back to 4Q13 levels after briefly pulling back in 1Q14. At the same time, vacancies are trending lower across all property types. Multifamily vacancies have fallen to 4. over recent years, driven by a shift from home ownership to rental. However, retail and office vacancies remain above %, which is significantly higher than in 7. Net absorptions have generally remained relatively stable over the past several years, suggesting a balance of supply and demand. The recovery in multifamily starts is outpacing that of single family, with multifamily starts reach 25-year highs. Net Absorptions, Vacancies: Multifamily 1 Units (k) 8 6 - - -6 (%) 9 8 7 6 5 4 3 Multifamily Starts Make Up a Larger Share of Total Starts as Consumer Turn to Rentals Mar-7 Aug-7 Jan-8 Jun-8 Nov-8 Apr-9 Sep-9 Feb- Jul- Dec- May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Net Absorptions Completions Vacancies (right) Source: REIS, Morgan Stanley Research
Construction Spending Grew % YoY in Multifamily 6 5 2 Construction Spending ($Bn) 3 4 5 6 7 8 9 11 12 13 14 15 9 8 7 6 5 2 Construction Spending ($Bn) 3 4 5 6 7 8 9 11 12 13 14 15 7 6 5 2 Construction Spending ($Bn) 3 4 5 6 7 8 9 11 12 13 14 15 Multifamily Commerical (e.g. Retail & Warehouse) Office 8 7 6 5 2 Construction Spending ($Bn) 3 4 5 6 7 8 9 11 12 13 14 15 35 25 15 5 2 Construction Spending ($Bn) 3 4 5 6 7 8 9 11 12 13 14 15 45 Construction Spending ($Bn) 35 25 15 5 2 3 4 5 6 7 8 9 11 12 13 14 15 Manufacturing Lodging Health Care Note: Value of selected private CRE-related construction put-in-place, SAAR. Data through January 15. Source: Census Bureau, MBA, Morgan Stanley Research
Apartment Sales Volumes Among Highest Total Volume Retail Volume Apartment Volume 1 ($bn) Individual Portfolio Entity ($bn) Individual Portfolio Entity ($bn) Individual Portfolio Entity 1 25 35 25 8 15 6 15 5 5 '9 ' '11 '12 '13 '14 '9 ' '11 '12 '13 '14 '9 ' '11 '12 '13 '14 Office Volume 45 ($bn) Individual Portfolio Entity 35 25 15 5 '9 ' '11 '12 '13 '14 Industrial Volume 18 ($bn) Individual Portfolio Entity 16 14 12 8 6 4 2 '9 ' '11 '12 '13 '14 Hotel Volume ($bn) Individual Portfolio Entity 9 8 7 6 5 4 3 2 1 '9 ' '11 '12 '13 '14 Source: Real Capital Analytics, Morgan Stanley Research