Fannie Mae and Freddie Mac, combined, again captured the lion’s share of the market for permanent multifamily debt in 2011—and that level of dominance will continue this year.
Balance-sheet lenders bounced back in a big way in 2011, as life companies slugged it out at the upper tier of the market and many regional and national banks began winning more short-term business. There was even a brief window in the spring when it seemed like conduit lenders had come back for good.
Despite the increased competition, the government-sponsored enterprises (GSEs) were able to maintain, and maybe even grow, their market share last year, as the overall market grew too. Freddie Mac estimates that its volume accounted for at least 30 percent of the market last year, and Fannie Mae likely recorded a little more than that, the companies are expected to announce at next month’s MBA CREF conference.
And while the GSEs will again take the great majority of the permanent-loan market in 2012, their looming presence should start to ebb back down to earth.
“The level of dominance by the FHA and GSEs has been truly historic, but I expect their market share to shrink as other lenders come back more fully into the market,” says Todd Trehubenko, managing director of multifamily for Boston-based CWCapital. “It’s going to continue to swing back toward a more typical environment.”
Many life companies are indicating they’ll have a bigger appetite for commercial real estate investments this year, which may force the traditionally picky sector to start expanding its credit box. But most likely, it will stick to its guns of low-leverage, high-quality deals.
“In 2011, life companies went from 10 mph to 100 mph,” says Bill Hughes, managing director of Encino, Calif.–based Marcus & Millichap Capital Corp. “The question becomes, can they go from 100 to 110? Could they go from a 65 to 67 percent loan? Sure, but I don’t see that being much of a change.”
There’s also been increasing activity coming from the banking sector, especially in the five-year loan space, though some are now going out as far as seven and even 10 years.
“Initially, it was the smaller regional banks getting into the game, and now we’re seeing some of the bigger money center banks playing for larger properties,” says Hughes.
The missing link—the wild card—is the CMBS market. The sector is quoting loans at least 150 basis points above the GSEs, and nobody can say just when it will again be competitive for multifamily deals. Still, the CMBS loans closed over the past year or so have been among the safest in history, featuring conservative underwriting and slowly attracting more investor interest.
“I think CMBS will bring more money into the market because more money will come to CMBS,” says Gary Mozer, managing director of Los Angeles–based George Smith Partners. “If it’s not a life company or GSE deal, there’s demand there.”
But taken together, the life company, bank, and CMBS lenders likely won’t put much of a ding in the GSEs’ armor—the GSEs are expected to capture more than 60 percent of the market again in 2012.