Multifamily Borrowers Might Benefit from Better Terms with CMBS Loans


CMBS lenders may be gaining in popularity with multifamily borrowers as Freddie Mac and Fannie Mae slow down in the race to make loans on apartment properties.

“Freddie Mac and Fannie Mae increased the borrower spreads dramatically,” says Mitchell W. Kiffe, co-head of national production for the debt & structured finance group at CBRE Capital Markets. “That creates an opportunity for other lenders.”

Long-term interest rates have dropped sharply in 2019. Economists have begun to seriously worry about a potential slowdown in the global economy. Federal Reserve officials no longer plan to raise their benchmark interest rates in 2019. Instead they have cut rates to give the economy a boost.

Lower interest rates have created a lot of new business for lenders. And the competition to make deals has changed the balance of power between different segments of the market.

“I have members who might be talking to banks who might not have been talking to banks until recently… People have been exploring CMBS,” says Dave Borsos, vice president of capital markets for the National Multifamily Housing Council (NMHC), an industry association.

Conduit lenders are back

For borrowers shopping for higher leverage, fixed-rate loans, the CMBS option is becoming more competitive and prevalent, according to Kiffe.

CMBS lenders offered interest rates fixed roughly 250 basis points over the “swaps” rate on August 22 for loans equal to about 75 percent of the value of an apartment property, according to CBRE data. That tended to work out to an all-in interest rate a few basis points over 4.0 percent.

Those rates are lower than what Freddie Mac and Fannie Mae lenders typically offered in mid-August. Agency lenders offered 10-year loans fixed at 260 basis points over the yield on 10-year Treasury bonds on August 22 for loans equal to about 70 percent of the value of an apartment property, according to CBRE. That often worked out to interest rate of about 4.1 percent.

That’s a change compared to the last few years. Until recently, Freddie Mac and Fannie Mae have consistently offered the most competitive deals on apartment loans. They were the primary source of long-term, 10-year loans in the sector.

Earlier this summer, however, experts worried that Freddie Mac and Fannie Mae might hit their caps on conventional, permanent loans on apartment properties. To keep from crossing that line, they have changed their incentives to steer more borrowers to take out loans that qualify for programs that don’t count towards their lending limits.

In addition, the new leadership of the Federal Housing Finance Agency (FHFA) continues to hint that it would like to take further steps to curtail the market dominance of Fannie Mae and Freddie Mac lenders.

Meanwhile, CMBS lenders are now frequently offering borrowers loans with interest-only (IO) periods. IO loans are also available through other lending sources, but CMBS shops tend to go farther than most lenders in the market on those.

Banks and debt funds also compete to make deals

Banks are also busy making deals and lending money. However, when they lend from their balance sheets, they continue to favor relatively short-term loan, floating-rate loans.

Debt funds created by private equity fund managers are also eager to lend on apartment properties. However, these funds tend to favor loans with terms shorter than 10 years. Most have planned to return their capital to their investors within a shorter timeframe.

Life company lenders are still focused on lending to the highest quality properties in the strongest markets. Currently, life companies offer interest rates ranging form 3.25 percent to 3.5 percent for a typical loan covering less than 65 percent of the value of a property, according to CBRE. That’s roughly 100 basis points below the “all-in” interest rates life companies offered last fall. But it’s still less of a drop that the steep fall in Treasury bond yields.

“The borrowers don’t get the full benefit of the drop in the indices,” says Kiffe.

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