The permanent debt space is growing more competitive, as life insurance companies, banks, and even conduit lenders give the government-sponsored enterprises (GSEs) a run for their money.

“The life insurance companies are voracious right now, the conduits are coming back, and it's amazing how quickly the market has just come ablaze,” says Holli Leon, executive vice president at Pittsburgh-based PNC Real Estate.

Fixed rates continue to stay historically low, with seven-year mortgages from the GSEs under 5 percent and 10-year money in the low– to mid–5 percent range as of mid-April.

But unlike this time last year, when recessionary aftershocks had many lenders treading carefully, today's borrowers have options beyond the GSEs.

Life Companies

As of mid-April, life insurance companies such as MetLife, Prudential, New York Life, and Northwestern were undercutting the GSEs on price, especially for lower-leverage transactions in major metros.

“In some recent deals, we've seen them come in as much as 20 to 30 basis points inside the spread of the agencies,” says Mark Hafner, a managing director of investments for Charleston, S.C.–based Greystar, a multifamily developer, owner, and management firm with 150,000 units under management.

As more competition returns to the market, life insurance companies are stretching beyond that 65 percent loan-to-value (LTV) range where they've historically focused. “We're seeing life companies start to push up to the 70 percent to 75 percent levels and still be competitive with the agencies on spread,” says David Schmidt, senior vice president of multifamily production at Cleveland-based KeyBank Real Estate Capital.

Life companies are particularly aggressive on large trophy deals and also win a lot of higher-end mixed-use deals, where the agencies typically aren't players. For instance, in early May, Prudential issued a 15-year, $125 million permanent loan to REIT Saul Centers for the Clarendon Center, a new mixed-use development in Arlington, Va., with 244 luxury apartments.

Unfortunately, today's low life company pricing may not last through the year. The appetite for multifamily deals at a life company is a fickle thing, driven as much by the attractiveness of alternative investments as by the desirability of the multifamily asset class itself. “Today's pricing reflects the amount of liquidity that's in the market [now] and the fact that big fixed-income investors have trouble finding yield,” says David Durning, a senior managing director with Newark, N.J.–based Prudential Mortgage Capital Co. “When quantitative easing ends later in the spring—and as we end a 20-year secular decline in interest rates— that relative value for fixed-income investors like Prudential changes, and that pricing dynamic may not always be there."

Banks and Conduits

Banks are also stepping off the sidelines in their pursuit of permanent loans issued from their balance sheets.

For example, New York City–based JPMorgan Chase's Commercial Term Lending division has grown much more active in its permanent-loan program this year, and other large players, such as PNC Real Estate, are developing an appetite again. “We recently rolled out a permanent product that we're prepared to hold on our balance sheet,” says PNC's Leon. “If it makes sense, we may aggregate and securitize those, but it's our intent that we would be comfortable holding it, or taking opportunities as the market presents them."

Indeed, the commercial mortgagebacked securities (CMBS) industry continues to gather momentum, though the sector has had a difficult time competing for multifamily deals. That's starting to change, as more CMBS lenders reopen their shops, target smaller deals, and expand their credit boxes. “A year ago, there were maybe three to five CMBS lenders actively originating loans, typically in excess of $10 million, for nicer-quality stuff,” says Vic Clark, who leads CMBS production at Bethesda, Md.–based Walker & Dunlop. “Now, there are 25 CMBS lenders happy to compete for your business and willing to go down to $3 million, and potentially doing B-minus–quality deals."

The biggest change in the CMBS industry as it reinvents itself is the re-emergence of the B-piece buyer as a driving force. In the mid- 1990s, the real work for a conduit lender began right before a transaction was securitized.

That's when B-piece buyers would ask dozens of questions about every loan going into a pool.

“As the years went on, the questions diminished, and they would just buy whatever was out there,” Clark says. “Today, the B-piece buyers are dictating everything. Most CMBS lenders don't want to close a deal unless they're absolutely certain a B-piece buyer will step up to purchase the note."

If the investor demand is there, interesting things can happen. Clark recently closed a fractured-condo deal that Fannie Mae and Freddie Mac wouldn't do because the borrower had control of only 83 percent of the units. It's those kinds of deals, the ones that fall outside of the GSEs' credit boxes, that CMBS lenders are winning now.

Still, the CMBS sector is only recovering on a relative basis— that is, relative to the past few years. About $40 billion in CMBS issuances will be brought to market this year, a big step up from the $16.1 billion done last year. In absolute terms, however, there is still a long way to go: CMBS is expected to make up just a fraction of the 2011 multifamily debt world. Traditionally, about 16 percent of CMBS issuances were multifamily loans—but as of mid-April, only one pool had more than 2.5 percent of multifamily loans this year.

“Over the last 18 months, the re-emergence of new-issue CMBS has been one of the most important stories in the commercial real estate market,” says Harris Trifon, head of global CRE debt research for Deutsche Bank Securities, based in New York City. “But we still need CMBS conduit lenders to come back to the multifamily market. Today, there isn't much being done to speak of."