In its March 2015 market report, Real Capital Analytics took a deep dive into 2014’s lending environment. And, while cries of overheated market have been prevalent for a couple of years now, the research firm found that underwriting assumptions only grew slightly more aggressive in 2014 than 2013. 

The average LTV on apartment loans climbed to 69% in 2014, after hitting 67% the year before. The big driver of that movement was agency lending, which went from from 65% in 2013 to 69% in 2014. 

RCA also may have found some justification for this movement in LTV. “The average asset quality may well have improved for these lenders with occupancy rates, average sale price, and average loan size all improving,” it said in the report.

Brokerage firms see this other factors pushing valuations, which may make lenders more open to raising LTV’s. “Because of the existing debt markets, the cap rate is accretive to your return,” says Brian E. McAuliffe, senior managing director for Los Angeles-based CBRE Group.

But what happens if that debt market changes? In the report RCA downplayed fears that increases in the 10-year Treasury would automatically mean a rise in cap rates. The research firm pointed out that cap rates only fell from 5% to 6% as treasuries fell 160 basis points from 2010 to 2015. It concluded that those trends show cap rates and treasuries are not automatically connected.

While the agencies’ risk appetite grew, their overall volume sled. In 2010, agencies were about the only game in town, claiming about 76% of all apartment activity. That figure dropped all the way to 46% last year.

“Their reduced market share is in line with FHFA directives for the agencies to reduce their activity in the sector,” RCA said in the report. “In shrinking their activity, the top level figures suggest that they are taking a little more risk on the LTV figures but moderating these risks with a higher quality set of assets.”

Agencies still dominate the tertiary markets as other lenders have gained ground in more expensive markets. In the expensive Northeast, for instance, regional and local banks, captured 35% in the region. 

Not surprisingly, the top lenders also varied when looking at types of apartments. Fannie Mae servicers dominated garden deals, while regional and local banks has the most volume in the mid- and high-rise space. 

“This switch of capital sources between subtypes speaks to the importance of the regional and local banks in the six major markets,” RCA wrote in the report.

Even in value add deals in smaller markets, the agencies are encountering more competition (from a familiar foe). “Fannie and Freddie are still the big player and CMBS is making its way in,” says Taylor Snoddy, managing director in Transwestern’s Dallas multifamily group.

They don’t have as strict guidelines. They’re very aggressive on their interest only loans. And, their interest rates are fairly comparable to Fannie Mae.”