Multifamily CMBS Poised for a Resurgence in 2021

February 09, 2021

Owners of apartment properties are likely to be tempted by conduit lenders in 2021 – especially if they need financing for a Class A or B market-rate apartment property.

Conduit or CMBS (commercial mortgage-backed securities) loan providers can potentially offer multifamily financing terms now more similar to those offered by the Freddie Mac and Fannie Mae lenders that have dominated multifamily lending for years.

Due to its streamlined platform, Greystone offers CMBS loans with lower interest rates and more certainty of execution.

Wall Street Pays Top Dollar for CMBS

Interest rates on CMBS loans are dropping in part because Wall Street bond investors paid more for CMBS (securities) in 2020 and early 2021, driving the yield on AAA-rated CMBS to less than 100 basis points over the benchmark yield on U.S. Treasury bonds -- in the 80-basis-point range as of January 2021.

“That’s probably the tightest that I have seen spreads in a couple years,” says Rob Russell, head of CMBS loan production at Greystone. Investors have been willing to pay more for CMBS because relatively few were issued in 2020 and the loans that back the bonds are strong. As the U.S. economy ground to a halt during the pandemic, CMBS lenders and investors became more conservative, especially the investors who buy the B-piece CMBS and take the first losses if a CMBS loan defaults.

“The B-piece buyers will really police what collateral ends up in securitizations,” says Russell. December 2019,Greystone bought C-III Asset Management, a special servicer of CMBS loans and buyer of B-piece CMBS. Having this expertise can add more control over the outcome and final terms of a CMBS loan.  

On average, the interest rates on conduit loans are getting closer to the low rates offered by agency lenders. “Generic CMBS interest rates will still be wide – 20 to 30 basis points wider than a comparable agency (Fannie Mae or Freddie Mac) loan,” says Russell. “A year ago, an agency lender would be anywhere from 30 to 40 basis points inside of CMBS lenders on price.”

Greystone has found a way to make CMBS loans with more competitive interest rates by concentrating on market-rate multifamily loans, which investors perceive to be less risky than other commercial asset classes, such as office or hospitality.

“Our spread on those loans will get closer and closer to the agency spreads on market-rate loans,” says Russell. “We might be 10 to 20 basis points wider. Maybe we would be right on top of them, depending on the deal.”

Freddie Mac and Fannie Mae Pulling Back on Market-Rate

Conduits are also likely to be more competitive in 2021 because Freddie Mac and Fannie Mae are more restricted on making loans for luxury apartment properties.

The regulators for Freddie Mac and Fannie Mae tightened the limits on how much each can invest in loans to apartment properties in 2021: just $70 billion apiece. That’s down from $100 billion apiece over the five quarters that ended in December 2020, or a rate of $80 billion a year. In addition, half of the loans Freddie Mac and Fannie Mae make in 2021 must support housing affordable to people earning a moderate income or less.

To make enough loans to affordable properties – and stay within their caps – they are likely to charge more expensive apartment properties higher interest rates, letting borrowers take a certain amount of their business elsewhere.

That creates an opportunity for CMBS lenders to make more loans – particularly to borrowers who need a package of high-leverage loans.

“It is easier to go CMBS…if you need a little more leverage,” says Russell. Both agency loans and CMBS loans tend to top out at about 75 percent of the value of an apartment property. However, CMBS loans can also be paired with relatively simple mezzanine financing to fill out the capital stack.

No Re-trading for Greystone CMBS loans

Greystone can also avoid another problem that torments many CMBS borrowers. “The biggest pain point for CMBS borrowers is not servicing. It’s re-trading,” says Russell. This is when the loan terms change at the closing table, a circumstance of CMBS being so closely tied to what’s happening in the market.

The investors who buy B-piece CMBS have been increasingly able to force lenders to modify loans that they have offered to borrowers. But Greystone both originates CMBS loans and buys the B-piece CMBS backed by those loans. This not only provides more control over the CMBS loan process, it lessens the chance for any surprises on the borrowers’ part.

“With Greystone controlling the CMBS underwriting and buying the B-piece, Greystone’s CMBS product is a powerful alternative to today’s market-rate apartment financing options,” added Russell.