This fall, several events related to Fannie Mae and Freddie Mac
occurred that cumulatively made them less competitive in multifamily lending and created uncertainty around the GSEs moving
forward. Since then, banks, life insurance companies and conduit
lenders are fighting tooth-and-nail to recapture multifamily financing market share in light of the resultant agency void.
Fannie Mae and Freddie Mac announced in late August that
they had reached their target loan production allocations for 2019.
As a result, agency loan production came to a screeching halt, with
the few ongoing transactions being executed at far more conservative levels and on a much more selective basis. Quoted spreads
widened approximately 70 basis points, leverage levels decreased
and waivers were halted, effectively stalling production and making
quotes much less attractive to commercial real estate borrowers.
In the following weeks, issuance of
the US Treasury Department’s long-awaited plan to end government conservatorship of the GSEs, as well as
the announcement of the Federal
Housing Finance Agency’s new lending guidelines for the GSEs, further
clouded the current and ongoing
multifamily lending operations of the GSEs.
Over the past several years, the multifamily lending sector has
been dominated by the agencies. Historically, the agencies have
been able to outperform life companies, banks and conduit lenders, due to their low cost of capital and governmental guaranties.
While they were created for the purpose of making housing affordable, they have slowly crept into the non-affordable housing space,
winning class-A multifamily housing business that typically had
gone to their competitors. As a result, the percentage of multifamily loans on the balance sheets of life companies and banks has
decreased over the years.
Coinciding with the emergence of multifamily as a preferred
asset class, non-agency lenders have fought hard to maintain
their market position, but to little or no avail. The events this fall,
however, have opened the window for non-agency lenders to
scratch back and regain any multifamily market position that
For example, banks, who typically never provide non-recourse
loans for multifamily above 65% LTV, have done so up to 75%.
Other ways banks have changed course to win deals include
drastically reducing origination fees, agreeing to waive prepay-
ment (opening loans at par for the full term), waiving deposi-
tory requirements for first-time borrowers and agreeing to rely
on older third-party reports at closing. Conduit lenders have
stretched on leverage and interest-only periods (often full-term
I/O) for multifamily product, while holding spreads even in the
face of declining treasuries, often providing debt well below 4%,
often 50-75 bps inside of the agencies. Life companies have
been aggressive on interest rates as well and have been very cre-
ative on prepayment flexibility, winning long-term multifamily
debt for borrowers wanting more prepayment flexibility than
CMBS can provide.
While this perfect storm of events came together to give non-
agency lenders a big opportunity this fall, I believe things have
already begun to return to normalcy for the agencies. Over the
past week or two, agency spreads have come back in 40-50 bps,
making them competitive again. This moment of bliss for non-
agency lenders may be short-lived, but in the long-term there is
some hope. An eminent end of government conservatorship, as
well as new lending guidelines, project a new direction for the
The loss of federal backing bodes well for the competitors of
agencies, as losses won’t be able to be as easily absorbed, bond
pricing will likely widen, and agency cost of capital will likely
increase. In addition, a move to more “mission driven” lending
(minimum 37.5% of total production moving forward) likely signals more of a return to lending in the affordable housing sector,
opening the door for life companies, banks and CMBS to compete for class-A properties. According to industry surveys, both
life companies and banks expect to increase multifamily production in 2020, a signal that they also foresee a more balanced playing field moving forward.
Ryan Haase is a director of capital markets for Franklin Street.
Lenders Race to Backfill Void Left by Housing Agencies
CAPITAL MARKETS WATCH
By Ryan Haase
“There will be a growing demand for specialty real estate
warehouses and data centers to house larger server centers,”
O’Hara says. “Many of this space will be required by the big tech
companies like Amazon and Microsoft as they continue to
expand, however they are only a part of the ecosystem that
relies on high-end computing power. These cloud service com-
puters will need to connect and communicate with other
It is common for commercial buildings to experience cellular
connectivity issues with 4G LTE. This may worsen with 5G.
“Unfortunately, this dilemma will only deepen as people begin to
depend on the higher frequencies utilized by 5G,” O’Hara says.
“5G requires a lot more antennas and boosters to maximize its
capabilities. This will have to be addressed on a property-by-
property basis and it is something for real estate owners to keep
in mind with both old and future properties.”
Already, REITs and c-corps are updating their infrastructure to
accommodate this flow of data, according to Pacer. O’Hara
expects higher-density areas to have an even larger build out for
5G due to the population and number of devices that will be con-
“5G and the build out of server farms for increased computing
and processing power is already underway across the United
States,” O’Hara says. “The infrastructure build out is happening as
we speak in order to accommodate this next wave of technology
and advancement.”—Les Shaver ◆