The multifamily debt market is evolving toward a more diverse competitive landscape beyond Fannie Mae and Freddie Mac, said speakers on the “All Access: Navigating the Growing Diversity of the Debt Markets” panel at the 2011 Multifamily Executive Conference.
While the government-sponsored enterprises (GSEs) continue to capture the lion’s share of the market for permanent debt—probably around 60 percent this year—the private sector has made itself known this year. Balance-sheet lenders like life insurance companies and banks have grown much more active, while the CMBS market grew in fits and starts this year.
In the second quarter, the growing diversity was on full display. Life companies were routinely pricing inside of the GSEs and even conduit lenders enjoyed a period of aggressive pricing as well.
But the CMBS industry lost its stride as the capital markets grew increasingly volatile over the summer. What conduits were pricing at around 200 basis points (bps) over the benchmark 10-year Treasury swap rate in the second quarter has doubled to 400 bps over today, leading to all-in rates north of 6 percent, said Vic Clark, senior vice president and central region manager for Bethesda-based Walker & Dunlop.
And though the 10-year Treasury yield is now at historic lows, most life insurance companies are now pricing higher than they were in the second quarter, when the benchmark was around 3 percent. While insurance companies are still competitive, many have now instituted interest-rate floors, said Guy Johnson, president and CEO of Irvine, Calif.-based Johnson Capital.
Banks are starting to flex their balance sheets again, as well. PNC is originating balance-sheet permanent loans again, sometimes going up to 10-year terms, and is selectively providing bridge loans to “relationship borrowers,” said Tom Booher, executive vice president of multifamily capital, for Pittsburgh-based PNC Real Estate.
Indeed, the bridge loan market has grown much healthier this year, as lenders like Walker& Dunlop and Berkadia opened programs, doing battle with active bridge providers like BB&T Real Estate Funding and Wells Fargo.
While more private-sector lenders are stepping up, the permanent debt market remains the GSEs’ heading into 2012. Given the continued struggles of the CMBS sector, and the selectivity of life insurance companies, the GSEs are expected to again serve the majority of the market next year.
The outlook is unclear as to when the CMBS market will achieve sustained competitiveness in the multifamily space. And if Treasury yields stay low—a good bet for next year given the Federal Reserve’s desire—then life companies may again find themselves unable to compete with the GSEs' cost of capital, panelists agreed.