In particular, as 2010 drew to a close, speculation abounded that it was indeed cheaper to build than buy in some markets. And with so many buyers acquiring higher-end assets (Class A and A-minus) at or below replacement value, many wonder how long that dynamic will last. “The natural progression is that competition is going to drive deals above replacement cost,” says William Ross, an executive vice president at Minneapolis-based Northmarq Capital. “As effective rents start to push up, you’re going to start to drive prices up above replacement costs, and some buyers are going to be more reluctant to play.”
Opening the Portfolio
Still, forging ahead with very little reluctance this year will be the GSEs, which will continue to win the lion’s share of acquisition loans. That doesn’t mean, though, that competition can’t give them a run for their money in 2011.
Take life insurance companies. In 2010, a number of large providers, including MetLife, Prudential, New York Life, Northwestern Mutual, Principal, and Nationwide, re-engaged the market. These portfolio lenders were mostly winning large, low-leverage deals in major metros, finding the most success on transactions that fell outside of the GSE purview—pre-stabilized assets, for instance, or deals in markets where concessions were rapidly burning off. “The agency underwriting is more backward-looking so in those types of circumstances, life companies can be more flexible and offer a better execution,” MetLife’s Wilsmann says. “And life companies can be more user-friendly in terms of documentation and having flexibility to tailor the deal to the borrowers’ needs.”
MetLife led the charge—it was the most active life insurance company in 2010, allocating about $1.6 billion to lend on multifamily assets. And the firm’s appetite will only increase. “We expect to have even more money available in 2011 to lend,” Wilsmann says.
On the other end of the spectrum are the commercial banks, which have been giving the market for five-year loans some competition. Many banks spent the past few years purging troubled real estate assets from their portfolios, and they seem to once again have an appetite for balance-sheet lending.
