Commercial apartment loans have fared very well, compared to other commercial real estate loans. We are still seeing low, long term fixed rates (up to 30 year), and underwriting standards that are not near as tight within other commercial property types. There’s a couple of different reasons for this. One is the historic stability of the asset class, and secondly, the government plays a big role in supporting the banks and lenders that fund commercial apartment loans.
The stability of the apartment buildings is both simple and complex. People need to live somewhere and rental housing is normally much easier to qualify for and get done. We are also seeing an interesting dynamic right now as many people re contemplate the benefits and potential appreciation of real estate ownership.
It was a “given” just 6 months ago that real estate was a sure thing. Now, many without the stomach for risk or the ups and downs of this investment class, have switched their attitude to the opposite perspective and have gone back to renting. In addition, the toughening credit standards for home buyers have forced many back into the rental market. As a result, demand for apartment housing has gone up and landlords are seeing some of the best quality tenants that they have in decades.
Commercial Apartment Loan
The government, through programs offered by Fannie Mae and Freddie Mac (and others) have kept the liquidity in the apartment marketplace. Without their involvement the apartment secondary market would probably look a lot like everywhere else. For example, other building types like office, retail, etc that do not get the benefit from Uncle Sam are down to portfolio lenders and underwriting guidelines like 60% loan to value - max.
The commercial secondary market for these building types is battered and bruised. Banks and lenders are having a very difficult time selling commercial debt off and are themselves forced to hold onto paper they meant to sell off.
What happens here with the government involvement for commercial apartment loans, is that Uncle Sam’s buy the debt from the funding bank/lender. The bank makes a fee by selling off the debt, and more importantly, they get back their capital back so that they can go out and fund another loan request. Besides the liquidity, this involvement give banks a lot of confidence and enables them to offer high leverage loans, like 80% loan to value on purchase and 75% on refinances because they believe they will be able sell the debt and not hold onto it over the long term.
