With 20 years of experience, Sharon Karaffa recently became the president of Newmark’s Multifamily Debt & Structured Finance division. In her new role, she will lead the company’s Fannie Mae, Freddie Mac and FHA lending platforms, during a period of prolonged monetary tightening and economic volatility that is affecting the entire industry and residents alike.
Multi-Housing News caught up with Karaffa to discuss how she expects multifamily lending to evolve in the upcoming year.
Timing is everything, what is it like to assume your new role at a time when debt liquidity is suppressed?
Karaffa: Assuming a new role amidst suppressed debt liquidity is an exciting opportunity to showcase adaptability and strategic leadership. The perpetual demand for safe and affordable housing becomes even more pronounced in the current landscape, characterized by higher home loan rates that increase the cost disparity between renting versus owning.
Despite a decline in purchase applications, household formation remains strong. Additionally, multifamily is the largest recipient of capital and is an outsized portion of the debt market, benefitting from access to the GSEs, which no other property type has.
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Necessity is the mother of invention, they say. What are some of the creative solutions you are offering clients?
Karaffa: Our increasing market share in both multifamily investment sales, and multifamily debt and structured finance has driven enhanced collaboration and partnership between our teams. That partnership, along with our ability to clear the debt markets, with deep private capital relationships, and all Fannie Mae, Freddie Mac and FHA executions, allow us the ability to offer a full range of solutions to help our clients meet their strategies, whether that’s a sale or a refinance, a recap with fresh equity or new joint-venture partnerships—individually or as a portfolio execution.
Is preferred equity still a popular alternative for investors?
Karaffa: Preferred equity is certainly a consideration for many investors in today’s market. Cap costs are higher, rent growth is slowing, and significant new supply is expected to be delivered in the next year—these are just a few factors driving the need for creative financing structures. Even with preferred equity, a borrower could qualify for competitive GSE debt if structured in accordance with Fannie Mae or Freddie Mac guidelines.
How concerned are you about distress/defaults in multifamily?
Karaffa: According to the Mortgage Bankers Association, $682 billion of multifamily loans will mature between 2023 and 2025. Our research team at Newmark estimates that $322 billion of these loans have loan-to-value ratios of 80 percent or higher.
There certainly will be some level of distress across the industry, particularly concentrated in bank and debt fund lending which account for just over half of the multifamily debt maturing over the next few years. Many of those loans have extension options that could be exercised while banks work to solve bigger problems on their balance sheet.
What kinds of opportunities do you see emerging from the distress?
Karaffa: We are strategically positioned to capitalize on opportunities across diverse markets. We have been retained to serve as an adviser to the FDIC on the sale of the Signature Bank portfolio. Our teams are working very closely with operators, equity providers, and lenders to advise them on creative solutions in this challenging market.
We have seen a substantial increase in Broker Opinion of Value activity across our platform as our clients look to Newmark to determine where opportunities exist. Being able to provide our clients with a top Fannie and Freddie lender, market-leading investment sales and loan sales teams, as well as world-class market research, Newmark continues to prioritize our commitment to supporting clients in navigating the challenges of an ever-evolving landscape.
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Fannie and Freddie were designed to ensure debt liquidity in multifamily. How well are they able to fill the gaps currently?
Karaffa: While the market has certainly been volatile, the GSEs have continued to be a very important capital provider and we truly value that partnership. It has been a challenge to structure loans in an environment where values are declining and rent growth is flat, but Fannie and Freddie have used creative solutions to maximize loan dollars while maintaining credit standards. Banks, debt funds and other capital providers have been less active in the market which has allowed us to increase our GSE market share across the country.
Interest rates are the linchpin to unlocking the investment and the debt markets. What is your prediction for interest rates?
Karaffa: Signs do point to rate relief in the second half of 2024, with a growing consensus that rate hikes are over, and rates may begin to come down mid-year next year. However, what we need is interest rate stability to boost transaction volume, and there are several contributing factors, both domestic policy and conflict overseas.
How do you expect 2024 to be like for multifamily financing? Will the volatility and uncertainties that defined 2023 continue?
Karaffa: We anticipate multifamily financing to pick up next year, with the MBA forecasting an estimated 20 percent increase in multifamily originations year-over-year. This, driven by a significant amount of stabilized, performing loans maturing and $217 billion of dry powder raised for equity investments—over half of which is targeted toward multifamily assets—suggests that things are looking up for multifamily in 2024.
Should we expect any new strategies from your unit now that you are leading it?
Karaffa: We remain laser-focused on creating and maintaining a platform that attracts the best brokers and originators. You can expect us to continue our growth trajectory, expanding our offerings to clients, with a renewed focus on affordable, mission, and workforce housing.
