As the government-sponsored enterprises (GSEs) continue to dominate the multifamily lending arena, many institutional lenders are shying away from new originations.

One of the biggest issues facing institutional lenders is the lack of turnover in their portfolios. In the past, lenders could expect a sizable portion of loans to come off of their balance sheets through prepayment or maturity, freeing up more capital to make new loans. That’s not the case this year.

“We have less appetite for new loans in 2009, but what really drives that is the fact that discretionary prepayments have slowed down because transaction activity slowed down,” says David Durning, senior managing director of Newark, N.J.-based Prudential Mortgage Capital Co.

Prudential is looking to lend between $3.5 billion and $4 billion to commercial real estate from its general account this year, but has earmarked about $1.5 billion of that for maturities within its portfolio. The balance would be for new originations, an opportunity that seems to shrink as the year goes on.

“Since the CMBS market ceased, it had been a very good time for life insurance lenders,” Durning says. “But over the last six weeks, it has slowed down quite a bit. You usually have a summer slowdown, but it feels more pronounced this year.”

In some cases, life insurance companies such as Protective Life and Northwestern Mutual are offering discounts to existing borrowers to prepay their loans to help clear their books. Though not every insurance company, pension fund, and commercial bank is shrinking its commercial real estate book, even those still actively lending are allocating most of their capital to refinance maturing debt, so there’s very little new money coming out. 

The cost of funds is also hampering competition. Rates from institutional lenders are routinely between 7 percent and 8 percent, while borrowers can still get rates in the mid-5 to 6 percent from the GSEs. And the leverage levels offered by institutional lenders often pale in comparison to what the GSEs can do.

“The leverage requirements are now down in the 60 percent range, and rates are in the 7-plus range,” says Phil Melton, a senior vice president of Charlotte, N.C.-based Grandbridge Real Estate Capital, which serves as a correspondent to dozens of life insurance companies. “That’s 10 basis points lower LTV and 100 basis points higher than the agencies, and there aren’t a whole lot of multifamily players that want to play in that space.”

But for borrowers looking to fund transitional properties, an area the GSEs won’t touch anymore, institutional lenders are a good bet. “No insurance company I know of is lending more than 70 percent of value, and most are 65 percent or less,” says Terry Halverson, a vice president at Horsham, Pa.-based Capmark Finance, which acts as a correspondent for many life insurance companies. “However, they can win deals, such as financing on properties still in lease-up, that are not a fit for the agencies.”

Most of the larger commercial banks are also scaling down their commercial real estate exposure. BB&T Bank’s portfolio has shrunk considerably over the last year, as has KeyBank’s. Bank of America, Citibank, and Wells Fargo are intermittently active.

Many local and regional banks, unburdened by toxic assets, are still in the game, especially on short-term loans. But these banks are mostly privileging existing clients that do all of their banking with them. Another roadblock is capacity: Small banks, by definition, don’t do huge deals. One way around those capacity issues is through a partnership, an increasingly popular trend at the local level.

“We’re seeing more consortium-oriented things, where community banks are trying to team together and come up with a way to start something in a local area,” Melton says. “With community banks, it is a capacity issue.”