Dive Brief:

• Government agencies, including Fannie Mae and Freddie Mac, financed 41% of all new apartment loans in 2021, according to data provided to Multifamily Dive by New York City-based commercial real estate data firm Real Capital Analytics. Despite pacing the field, the agencies lost market share compared to the five years before the pandemic, when they accounted for 54% of loans on average.
• As the agencies’ share of the market declined, commercial mortgage-backed securities lenders grabbed 15%, their highest share ever, putting them in second place, according to RCA. Collateralized loan obligations claimed 60% of CMBS loans and 9% of all apartment loans.
• Insurance companies, like CMBS lenders, targeted loans of around $36 million. Banks accounted for 24% of new originations for the year. Investor-driven lenders claimed 12% of the market, hitting their highest share.

Dive Insight:

Don’t expect 2021’s lender preferences to hold in 2022. With rising interest rates, borrowers have been forced to adjust.

“More recently we were locking in five-year, fixed-rate debt with prepayment flexibility with banks and life companies in the low- to mid-3% range given the flattening of the yield curve,” said Matt Ferrari, co-chief investment officer and head of acquisitions and East Coast asset management for Los Angeles-based TruAmerica Multifamily. “However, that ship seems to have sailed as short-term and long-term rates have started to move up quite dramatically in just a few weeks.”

Debt fund spreads have also increased as the capital markets have shifted, according to Ferrari. “Time will tell if this will have an impact on the pricing of deals but I sense there is a pause in the market despite there still being a lot of equity out there that needs a home,” Ferrari said.

2021 preferences

The RCA report pointed to other trends as well. As the apartment market grew more heated in 2021, some buyers began to seek options outside Fannie Mae and Freddie Mac. For example, TruAmerica, RCA’s ninth most active buyer in the sector in 2021, sought options outside of the agencies during the year, according to Ferrari.

“We did almost no agency debt last year because it was not competitive given where cap rates were,” Ferrari said. “There were a lot of debt funds out there and banks got aggressive as well.”

For buyers looking for options, investor-driven lenders including debt funds and mortgage REITs provided another option. These lenders were underwriting an average loan-to-value of 76.5% above the market average in 2021 (on the other side, traditionally conservative life insurance companies are 340 basis points below the market average).

“The non-bank sector became more aggressive [last year],” said Jim Costello, senior vice president of Real Capital Analytics. “They didn’t have the same kinds of regulatory burden. With agency lending, they can underwrite the current rents in place. Somebody else can be a little bit more aggressive and underwrite to recognize the fact that rents have grown quite a lot, and they [the borrower] has some units coming up that they are going to reposition them.

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