For many institutional lenders, their balance sheets are, well, a little unbalanced right now.
Banks, life insurance companies, and pension funds have scaled back their commercial real estate appetites this year and are keeping the wraps on their balance sheet loan pipelines.
For the most part, these large institutions are unable to compete with government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac on permanent loans. And since these institutions are seeking to limit the commercial real estate exposure on their balance sheets, financing for transitional assets—specifically for new construction deals—has done a disappearing act.
Formerly active life insurance companies, including Aegon, Nationwide, and Lincoln National, have taken themselves out of the market. Those still active in the multifamily debt game, such as Prudential, New York Life, and MetLife, are taking a conservative approach, says John Cannon, executive vice president at Capmark Financial Group, which acts as a correspondent for many life insurance companies.
These institutions are cherry-picking deals, looking for only the best of the best assets. And they typically offer leverage levels of between 50 percent and 60 percent, with interest rates above 7 percent.
“Most of them are in and out of the market, and you’re not sure what you’re going to get any given day,” says Phil Melton, a senior vice president at Grandbridge Real Estate Capital. “The good news is that multifamily is at the top of their list. But their interest is very deal-specific.”
Melton, whose company acts as a broker for dozens of life insurance companies, sees many life companies focusing instead on opportunities in the office, retail, and industrial markets. Those sectors are starved for liquidity, and since institutional lenders can’t compete with the GSEs in the multifamily world, they’re now pursuing retail and office sponsors with well-positioned assets.
“Insurance companies are the only source left to fund those assets,” Melton says. “Their buckets are going to get pretty full on those sorts of deals, and it’s not as competitive there as it is on the multifamily side, which already has Fannie, Freddie, and the FHA.”
At a local level, several regional banks with healthy balance sheets are still actively issuing multifamily loans. But with the luxury of having the market to themselves, those regional players are acting conservatively as well. The regional banks are both scrutinizing deals and taking a much closer look at the borrower’s financial health.
“I’ve seen an increase in liquidity and net-worth requirements in the last three to six months,” said Tammy Linden, a regional director with Bond Street Capital, at the recent Apartment Finance Today Conference. “Banks are also taking a much more strenuous look at your contingent liabilities.” Contingent liabilities measure the probability of a future loss based on the outcome of certain events, such as foreclosures.
Outside of regional banks and life companies, many smaller institutional lenders are closing debt funds targeting the multifamily industry. These institutions see a big opportunity in funding transitional assets and stealing market share from the larger players.
Mesa West Capital is one such player that has been particularly active in issuing bridge and mini-permanent loans on the West Coast this year. The company says it has more than $1 billion to deploy in 2009. Likewise, Carmel Partners, historically an equity investor, recently expanded into providing multifamily debt. The company will focus on high-yield mortgage and mezzanine debt through both new origination and purchases of existing loans.