Multifamily Bond Market Continued to be Robust in 2017 Despite Tax Reform Threat
As reported previously, the multifamily bond market was robust in 2017 at a record $15.3 billion in bond issuance sustaining the historically high levels from 2016 despite the threat of tax reform. To put these levels into context, it is helpful to review historical background.
Historical Background since 2000
Multifamily bond issuance grew fairly steadily between 2000 and 2007, with roughly $3 billion in bonds issued in 2000 and approximately $6.25 billion issued in 2007, according to data reported by the Council of Development Finance Agencies (CDFA). However, in 2008 multifamily bond issuance dropped by $4.6 billion, or 78 percent. The financial crisis made investors and lenders significantly more risk averse, reducing their demand for a variety of bond instruments. Furthermore, interest rates for taxable debt was so low that they were often more appealing than debt from multifamily bonds. This, in turn, reduced the demand for multifamily housing PABs.
CDFA data show the market remained weak in 2009, but began to recover in 2010, with $2.4 billion in multifamily housing PAB issuance, and continued to grow modestly to $6.6 billion in 2015. In 2016, multifamily issuance jumped to $14 billion, and then further increased to $15.3 billion in 2017. The multifamily bond market has not only largely recovered, but continues to be robust.
Percentage of Multifamily Issuance out of Total Issuance
Despite the fact that the quantity of multifamily bonds issued steadily climbed upward between 2000 and 2007, the percentage of multifamily bonds out of total PABs issued actually began to decline as early as 2004. This pattern suggests that while the multifamily bond market heated up prior to the financial crisis, the PAB market as a whole heated up even faster. When the financial crisis hit in 2008, the moderate decline of multifamily bonds as a percentage of total PABs accelerated because of the collapse in multifamily bond issuance, with only 9.4 percent of all PAB issuance going to multifamily. CDFA data shows that the percentage held steady in 2009, began to recover in 2010, and accelerated dramatically in 2011, as the demand for other PAB eligible uses remained depressed while multifamily recovered more rapidly. Indeed, the percentage of PAB cap going to multifamily reached nearly 56 percent in 2014, further increasing to a record high 68.7 percent of total PAB issuance in 2016.
Percentage of Total Bond Cap used for Multifamily
The percentage of total bond cap available used for multifamily housing is another important to point to consider. Between 2000 and 2015, the year with the highest percentage was 2002, with about 18 percent. According to CDFA, in 2002, 18.3 percent of the total cap available was issued for multifamily housing. The percentage of multifamily housing generally declined at a moderate pace until 2007. The financial crisis hit the multifamily housing market hard, dropping the percentage of multifamily housing from about 12 percent in 2007 to 2.5 percent in 2008. The percentages began to slowly rise in 2010. This growth was partially because of the housing market recovery, and partially because specific provisions of the Housing and Economic Recovery Act (HERA) of 2008 expired. HERA added extra housing cap in 2009 and 2010, increasing the total amount of bond volume cap available, thus pushing down the percentage of the total cap available that was issued as multifamily housing bonds. When the additional housing cap expired, the percentage of multifamily bonds rose. However, with plenty of unused PAB cap being carried forward, the multifamily percentage remained relatively low at 7.3 percent in 2015. With the rapid issuance increase in 2016 sustained in 2017, the multifamily percentage reached a recent high of 16.9 percent.