The world of commercial real estate has been in a state of disarray amid the subprime crisis and the resulting foreclosures, rising unemployment, and the dislocation of the securitization and capital markets. Now, investors and lenders are debating the implications of the federal government’s rescue of mortgage giants Fannie Mae and Freddie Mac. While some say that the bailout is enabling the multifamily real estate sector to proceed at a healthy pace, others worry that the companies will be so focused on helping single-family homeowners that the multifamily market could suffer.

“While clearly the events of the last few weeks have been historic for capital markets, most indications are that both Fannie and Freddie will operate as ‘business as usual’ on the multifamily platform,” an associate at Ackman-Ziff Real Estate Group, Eli Weiss, said. “Given the confidence by the backing of the U.S. Treasury, the overall borrowing cost for both mortgage companies has been reduced, and borrowers can expect that to translate into a more stable spread environment for their multifamily loans.”

Both companies are well positioned to continue providing liquidity for the multifamily market, Mr. Weiss said, noting that 30-year Fannie Mae paper is currently trading in line with Ginnie Mae, the student loan company that is guaranteed by the full faith and credit of the federal government. “Thus, given that both Fannie and Freddie’s multifamily portfolios are exhibiting extremely low delinquency rates, coupled with the fact that Rep. Barney Frank, who has historically been a strong proponent of multifamily programs, will be the key person in Congress as chair of the Financial Service Committee, involved in any oversight, both agencies should be well positioned to continue to provide liquidity for multifamily transactions.”

In December 2007, the chairman and founder of the Lightstone Group, David Lichtenstein, appeared on my television show, making a comment that was highly controversial to my guests on the panel: “In 2008 we will see blood in the streets.” I am hoping his view of the future of the business world does not come to fruition.

The first nine months of 2008 have been a year of unfortunate events: Bear Stearns, the Freddie and Fannie rescue, the sale of Merrill Lynch and the government’s rescue of AIG, the total dismantling of the commercial mortgage-backed securities market, and the unprecedented bankruptcy of a 158-year pillar of investment banking, Lehman Brothers. A former Fed chairman, Alan Greenspan, said over the weekend that this is perhaps the worst economic time he has seen in the past 50 years, or even the century.

It is taking much longer to rent apartments, and instead of renting for higher prices to reflect the increases in the costs of operation, rents are actually declining. With the changes taking place in the arena of multifamily, industry leaders have varying views on the financing for multifamily residential properties.

“Of all areas of real estate, the underlying market for multifamily is holding up the best,” the chairman of the board at Signature Bank, Scott Shay, said. One outcome from the declining availability of residential single-family mortgages and from the forced sales and foreclosures of single-family homes is that demand for rental apartments is likely to remain robust. The only real offsets to this are houses that are being put on the rental market and condos that are being converted into rentals.

“Yet financing for multifamily is also facing severe headwinds as the Wall Street firms who securitized this form of mortgage financing, who used to love multifamily loans so much they increased elevations on collateralized mortgage-backed securities to create larger AAA trenches. With the securitization market in deep freeze this source of demand for loans is gone,” he said.

Mr. Shay added, “Fannie Mae and Freddie Mac are also large lenders to the multifamily sector, and there has been a big concern that under the federal conservatorship they will hone their focus only on single-family lending to support the exploding housing market. I am starting to think that they will still participate in multifamily because there is a strong public policy argument now that they are not just supposed to maximize shareholder value. … My advice to folks refinancing multifamily is to focus more on institutions with a reputation for getting deals done than on the last quarter of a point. The market is so tricky that it does not pay to take closing risk.”

Scott Swerdlin, the senior vice president for commercial real estate and multifamily lending at Capital One Bank, an institution that has outstanding more than $5.5 billion in multifamily loans, said: “Perhaps in the future Freddie and Fannie’s multifamily loan purchases will be limited to apartment buildings located in ‘affordable housing’ neighborhoods (low and moderate income). Companies that have competed with Fannie and Freddie for large loans, including Mass Mutual, Prudential, and John Hancock, and pension funds, could absorb the financing for large apartment complex financing with attractive pricing.”

He added that the debt on multifamily properties “should be financed with the collateralized mortgage backed securities where aggressive underwriting assumptions with discounted cash flows over a 10-year period will not be achieved. Recent disclosure of loans made in Harlem is just the tip of the iceberg. Many apartment acquisitions were overleveraged utilizing this method of underwriting, thus upon maturity of the loan, or the depletion of the interest reserve, the debt will be greater than the value of the asset. The bond holders are in for many long days of restructuring. It is our understanding that local community banks did limited amount of these types of aggressive underwriting deals.”

The executive vice president for real estate lending at Capital One Bank, Rick Lyon, said there is “a concern that high-end, Manhattan residential rent levels will decline as Wall Street layoffs occur, just as they did ten years ago. Smart landlords will negotiate lease extensions with their tenants and offer concessions in order to maintain cash flow. Some landlords will offer existing rent regulated tenants a ‘preferred rent’ for a one-lease term in lieu of the automatic rent stabilized increase. If unemployment figures increase, we expect there to be an increase in credit loss for all levels of apartment product in the metropolitan area.”

The president of Estreich & Co., Jonathan Estreich, a principal at RCG Longview, said, “My guess is that things will return to the 1980s and the late 1990s and the early 2000 era as to how multifamily was underwritten and financed, and the lenders will be, for the most part, the guys who were there at those times.”

Mr. Estreich said that, “in addition, a great deal of business was driven by the sales market and the public-to-private market. The latter doesn’t exist anymore and the former is way down by historical standards. In addition, Fannie and Freddie have not gone away and are still in business. The problems will occur when some of these deals that were done in the past couple of years run out of their interest reserves, can’t make their projections, can’t refinance, and need to be worked out. Either the sponsor comes with money and works the deal out with existing lenders or it goes to foreclosure.”

William McCahill, a partner of mine at Apollo Real Estate Advisors, who previously served as the head of the real estate department of Bank of America, said: “With the federal takeover of Fannie and Freddie, multifamily projects have a good chance of joining the other property types in the credit crisis. To date, multifamily has had the benefit of a stable and liquid financing market supplied by Freddie and Fannie. That may be over. Increasing vacancies, sliding rents, and now possible financing issues will change cap rates and values for multifamily.”

He added: “The fear is that the new administration in Fannie and Freddie will be looking to clean up the subprime and Alt-A mess, while the multifamily programs take a back seat. Hopefully, this will not happen.”

The senior executive vice president at Emigrant Savings Bank, Patricia Goldstein, said, “Hopefully, Fannie and Freddie will continue to operate at a reasonable level. If there is limited money available it will hurt the sales market and banks that are trying to liquefy their balance sheets. Lenders will provide multifamily financing before they even consider financing an office building, or hotels, which are deteriorating. Loans-to-values are being reduced and so are appraised values of properties due to lower rents, concessions landlords are providing tenants (like the payment of brokerage fees and free rent), coupled with significantly longer times to lease up a property. This is on top of limited collateralized mortgage- backed securities financing, which is causing an ever-growing crisis. To complicate the matter, the financial institutions capital is decreasing, causing less ability for them to lend.”

The executive vice president at Atlantic Development Group, Chuck Brass, said, “On the up side, we are hoping that Fannie and Freddie stay in the business and we are told that they will, as multifamily is one area of each company that was profitable, even in recent times. Unfortunately even before they were taken over, Fannie and Freddie had raised fees and tightened credit standards. Commitment fees have gone from a tenth of a point to a full point. Annual credit enhancement fees to guarantee variable rate bonds, a key source of financing for affordable and mixed-income housing, have gone up 50 basis points, reducing the amount of permanent debt that projects can support.”

He added: “We’ll have to see what they do now that the companies have been put under receivership. Nevertheless, even with higher fees, without Fannie and Freddie, we go back to the 1980s and early 1990s, where the only source of long-term debt for multifamily affordable housing were state and local agencies, or Housing and Urban Development funds from the Federal Housing Administration. We’re fortunate in New York City and State to have great active City and State Housing Finance Agencies that can help to fill the gap, but they wouldn’t fully take the place of the GSEs.”

So what does this all mean to the world of multifamily residential for our region? This asset class continues to be highly desired by investors who are prudent and realistic that the rules for financing are no longer in favor of the borrower. Lenders, including Fannie, Freddie, and commercial and savings banks, will continue to provide conservative low-leverage financing to experienced borrowers with a track record.

Mr. Stoler, a contributing editor of The New York Sun, is a radio and television broadcaster, and a senior principal at a real estate investment fund. He can be reached at mstoler@newyorkrealestatetv.com.