As the conduit space heats up, Fannie Mae and Freddie Mac may soon start feeling the heat.

Since the beginning of the year, CMBS pricing has steadily dropped and now some conduit quotes are comparable to what the government-sponsored enterprises (GSEs) are offering on upper-crust multifamily deals.

“CMBS is going to start competing moving forward on every single multifamily deal because their pricing and leverage is now in line with Fannie and Freddie, and it wasn’t that way three months ago,” says Vic Clark, a senior vice president and central region manager at Bethesda, MD.-based Walker & Dunlop. “CMBS is now literally right on top of Fannie and Freddie on most trophy Class A deals, and that’s huge.”

Some conduits are now offering spreads of around 200 basis points (bps) on trophy deals, leading to all-in rates in the 5.05 percent to 5.20 percent range for 10-year fixed money. In contrast, those spreads were about 270 bps over the benchmark 10-year Treasury swap in January. Some of the most active conduits today include Wells Fargo, Deutsche Bank, Morgan Stanley, Ladder Capital, Centerline, and Cantor Commercial Real Estate.

The expanding CMBS sector has won many deals this year in niche markets, such as student or military housing. Conduits have also been able to win some deals that, for one reason or another, fall outside of Fannie and Freddie’s sometimes rigid credit boxes—assets that are pre-stabilized, for instance, and haven’t yet shown 90 percent occupancy for 90 days.

For instance, Clark recently priced a CMBS loan for a B asset that’s 51 percent occupied by members of the military, a tenant concentration that the GSEs don’t like. He was given a conduit quote of 215 bps over the benchmark 10-year Treasury swap, resulting in an all-in rate in the low to mid-5 percent range.

While CMBS pricing has certainly dropped, it remains to be seen how sustainable that dynamic is. After all, this is an industry that will soon have a new set of rules—and nobody can definitively say yet what those rules are going to be. And the CMBS sector really hasn’t made a big splash yet in the high-end trophy acquisition space.

Meanwhile, Freddie Mac, which has seen much more competition from life insurance companies this year, is wary of the momentum in the conduit space. “We really haven’t seen them make significant inroads into our share. But if not now, what about when spreads tighten another 10 bps, or another 10 bps after that?” says David Brickman, senior vice president and head of multifamily at McLean, Va.-based Freddie Mac. “At some point it will be more competitive. We want to keep our eye on them”

Last week, Freddie Mac began making its adjustable-rate mortgages (ARMs) eligible for securitization through its Capital Markets Execution (CME) program. The move should help the company to offer lower rates on its ARMs, a price break that usually averages about 20-40 bps whenever a previously portfolio-based product—like affordable, student, or seniors—is added to CME.

The conduit sector’s return to competitiveness is a welcome development to smaller multifamily borrowers who didn’t have many options before. And the transformation that the CMBS industry has undergone over the last year is staggering. Where there were five lenders a year ago, there are now more than 25, some of which are going down below $3 million and into secondary and tertiary markets.

“The reality is, there’s liquidity on Main Street right now because of the return of CMBS,” says David Repka, principal at St. Petersburg, Fla.-based broker Bison Financial Group. “There’s liquidity again for markets outside of those 24/7/365 coastal markets.”