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

Fixed rates continue to stay historically low, with seven-year mortgages from the GSEs still 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, borrowers have more options beyond the GSEs. 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, as of mid-April.

“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, managing director of investments for Charleston, S.C.-based Greystar.  
As more competition returns to the market, life insurance companies are stretching beyond that 65 percent 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 KeyBank Real Estate Capital.

But today’s 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 today and the fact that big, fixed-income investors have trouble finding yield,” says David Durning, senior managing director of 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 won’t always be there.”

Banks and Conduits
Banks are also stepping off the sidelines in their pursuit of permanent loans issued from their balance sheets. 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 Holli Leon, an executive vice president with Pittsburgh-based PNC Real Estate. “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 present themselves.”

Indeed, the 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 re-open 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 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 B-Piece Buyer
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 would not do because the borrower only had control of 83 percent of the units. It’s those kinds of deals, which fall outside of the GSEs credit boxes, which CMBS is winning now.