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 are 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 were 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 June. 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 fall outside of Fannie's and Freddie's sometimes rigid credit boxes—assets that are prestabilized, for instance, and haven't yet shown 90 percent occupancy for 90 days.

For example, 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 dropped, it remains to be seen how sustainable that dynamic is. The industry 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 hasn't made a big splash yet in the highend trophy acquisition space.

But the transformation of the CMBS industry over the past year is staggering. Where there were five lenders a year ago, there are now more than 25, some of which are going below $3 million and into secondary and tertiary markets.