Real Estate Forum - October 2015

MIDDLE-MARKET COMMERCIAL REAL ESTATE
BORROWERS HAVE NOT EXACTLY BEEN FETED
OVER THE YEARS BY LENDERS EAGER FOR THEIR
BUSINESS. THAT IS CHANGING AS INSTITUTIONAL
CAPITAL HAS ENTERED THE MIX.
Finance Quarterly

It took the McLean, VA-based GSE Freddie Mac about 11 months since the launch of its small balance multi-family loan origination platform in October 2014 to reach $1 billion in originations.

That doesn’t seem like that big of an achievement until you realize that the program didn’t start actively securitizing these loans until August of 2015, at $100 million a pop. One very short month later it made its grand announcement that the $1-billion mark had been reached.

For Stephen Johnson, Freddie Mac senior director of multifamily production for small balance loans, the program’s momentum couldn’t happen fast enough. Not because he was concerned it wouldn’t take off—based on extensive market feedback before launching the program, he knew that it would.

Rather, he was eager to see the pro-
gram’s larger goal—introducing liquidity
into a parched small and middle market
multifamily lending environment—be
realized.

“This program provides a secondary
outlet for these loans,” he says. “It gives the
lenders in this sector more liquidity, which
also furthers affordability.”
There are other reasons to be excited
about Freddie Mac’s efforts to build out
small loan financing. The debt financing
market for small properties will benefit
from the standardization, leading to more
consistency, competition and, hopefully,
transparency across the industry.
Subsequently, appetite for these securities
on the part of investors should also increase.

Freddie’s small loan securitization platform is, without a doubt, a great development for middle-market commercial real estate borrowers.

But Freddie Mac isn’t the only driver
steering this particular bus. Over the past
year or so, there have been a number of
developments that are adding liquidity in
this segment of the market and it is not
just limited to the multifamily sector. New
players are entering the middle-market
commercial lending sector, while long-
standing lenders that provide related
products such as bridge loans are expand-
ing their platforms. In many cases, these
activities are being funded with institu-
tional capital. Banks, too, are stepping up
their game, often acquiring other banks
to stay competitive.

The reason for the push? The same one that drives investors in all deals, across all asset classes. There is both demand for middle market commercial real estate finance and opportunity for investors to achieve a bit of yield.

This dynamic can be seen even at the individual product level, such as the ubiquitous bridge loan. “There is greater demand for bridge debt today than there was 12 or 24 months ago,” says Al Moczul, senior vice president and regional director of Berkadia, in Jacksonville, FL.

This seems to be especially true for the multifamily sector, he continues, as cap rates for stabilized assets have been driven down so low that investors are looking