While some may argue that Freddie and Fannie have single-handedly saved the multi-housing sector from disaster during the Great Recession, others counter that they are single-handedly responsible for artificially low yields. However, no one can argue with the fact that over the past several years the agencies have provided much needed liquidity to the multihousing industry. From 2009-12, Freddie and Fannie have collectively financed in excess of $235 billion of apartment loans, the lion’s share of multihousing loan production. But this is changing.
With the yield on the 10-year Treasury now hovering around 2.8 percent, investors have witnessed a roughly 150 basis point increase in the cost of permanent debt within the last 12 months. The rise in yields on U.S. treasuries, coupled with widening credit spreads (aimed to reduce Freddie Mac and Fannie Mae production as they ready themselves for eventual privatization), have provided opportunities for other capital providers to regain market share.
Life insurance companies, banks, CMBS lenders, specialty credit/finance companies and mezzanine providers have all been able to retake market share given the unique features that each has to offer. Life insurance companies, for instance, have offered aggressive credit spreads, flexible prepayment, the ability to lock rate at application (which has proven especially attractive in a rising interest rate environment), as well as providing loan commitments in advance of stabilized occupancy and seasoned operating history. Banks, likewise, have been an attractive source for borrowers by offering low credit spreads, longer-term loans and the ability to match loan proceeds offered by Freddie and Fannie by partnering with mezzanine providers. And CMBS lenders have been especially adept at capturing business in tertiary markets and on mixed-use properties, or where borrowers are seeking maximum leverage financing.
Locally, we have witnessed this first-hand, with recent transactions such as Piazza D’Oro (Oceanside), Solterra EcoLuxury Apartments (Scripps Ranch), and Circa 37 (Mission Valley) all opting for life insurance company financing this year.
The continued path to privatization for Freddie and Fannie, a recovering CMBS market, healthier bank balance sheets and increasing real estate allocations from life insurance companies bode well for the future of the asset class.
HFF (Holliday Fenoglio Fowler, L.P.) and HFFS (HFF Securities L.P.) are owned by HFF Inc. (NYSE: HF). HFF operates out of 22 offices nationwide and is a leading provider of commercial real estate and capital markets services to the U.S. commercial real estate industry. HFF together with its affiliate HFFS offer clients a fully integrated national capital markets platform including debt placement, investment sales, equity placement, advisory services, loan sales and commercial loan servicing. For more information please visit hfflp.com or follow HFF on Twitter at twitter.com/hff.