The market for permanent debt has grown much more competitive over the last six months, said panelists on the “Meet the Money” panel at this week's Apartment Finance Today Conference.
Life insurance companies and some commercial banks are increasingly challenging the dominance of Fannie Mae and Freddie Mac, often by offering a more flexible product.
Greystar Real Estate Services recently found a five-year fixed rate loan from a life company below 4 percent, which is around where the government-sponsored enterprises (GSEs) are quoting. The Charleston, S.C.-based firm also recently found a $50 million five-year bank loan at 3.86 percent for a high-rise building in Washington, D.C. that had a $9 million renovation plan. The GSEs were requiring a significant escrow for the renovation funds, but a commercial bank was able to fully fund the loan at closing.
“What we’ve been surprised by somewhat is the entry of commercial banks, at good loan-to-values, low fixed rates, nonrecourse,” says Derek Ramsey, CFO of Charleston, S.C.-based Greystar Real Estate Services. “But it hasn’t been any type of stable, predictable way—at certain moments, certain banks have an appetite for certain products, and if you happen to have it, they’ll be very aggressive.”
While about 70 percent of Behringer Harvard’s portfolio is financed through GSEs, it has recently seen more competition from the private sector. It put a seven-year fixed-rate loan at 3.86 percent through Prudential Mortgage Capital on a stabilized mid-rise property in San Bruno, Calif. And it also recently took out a floating rate loan through Wells Fargo for a deal in Addison, Texas, priced at 245 basis points above the benchmark LIBOR, said Mark Alfieri, chief operating officer at Addison-based Behringer Harvard Multifamily REIT 1.
Life companies are most competitive on two fronts, said Dan McNulty, president of New York-based Rockwood Real Estate Capital. One front is on longer-term, say 15- or 20-year, permanent debt. And flexibility, especially regarding prepayments, is a major consideration. His firm recently arranged financing for a mixed-use property in Beverly Hills, Calif. that the purchaser wanted to turn into corporate apartments. The GSEs quoted some great rates, but said that only half of the units could be run as corporate apartments.
“Life companies stepped up, and though they were 50 bps higher, they were prepared to give that flexibility in how they ran their business model,” McNulty said.
Paul Angle, Freddie Mac’s managing director of the West region, conceded that there are certain underwriting terms where the company holds the line pretty tight. Last year, pretty much all of the deals Freddie did were at a 1.25x debt service coverage ratio. But the company’s consistency is something that the private sector just can’t match.
“In the last year when rates dropped, life companies had floors or they may have met their allocations, and we were happy to do the Class A product,” said Angle. “Class B product, Class B locations, is the bread and butter of what we do. We pretty much yield to life companies when they have an appetite, but we’re consistently in the market.”