Historically low interest rates aided the residential finance business greatly the past few years but also profoundly affected commercial lenders and servicers. According to exclusive survey figures compiled for the 11th edition of the Mortgage Industry Directory, the nation's commercial mortgage lenders - banks, thrifts, non-depositories, life insurance companies, pension funds and others - funded $185 billion in loans last year, a 9.3% decline from 2003. The multifamily sector, though, was particularly strong with lenders funding a record $54.1 billion. (See tables.) It was the third year in a row that the industry funded $50 billion or more with another $50 billion-plus anticipated for 2005.

It would appear that multifamily owners (apartment buildings that have five or more rental units) are imitating the consumer by refinancing their existing mortgages. We estimate that the commercial refi rate was 42% of production. (The residential rate was 52%.) Managing a rental property is a business that is predicated on managing cash flow. If an owner can reduce their debt load (the mortgage payment) even by a modest amount it can make a world of difference in the P&L. As any businessman knows P&L is what it's all about.

Commercial mortgage banking occupies an interesting niche in real estate finance. Judging by the production volumes of the past seven years, it's (somewhat) safe to conclude that commercial lending has been a "steady-as-she-goes" business not prone to the boom-and-bust cycles of residential finance. As any historian of commercial lending can tell you it hasn't always been this way. Back in the 1980s the deregulation of the savings and loan industry unleashed a commercial overbuilding craze.

Equipped with new lending powers (commercial real estate in particular) hundreds of savings and loans — including many de novo thrifts launched by real estate developers — went on a wild and crazy commercial lending spree, financing projects of all sorts that should never have been built in the first place. (Remember Charlie Keating and Lincoln Savings?) Compounding the problem, quite a few commercial banks joined the craze as well, lending billions of dollars on risky projects that made no economic sense.

Eventually the S&L industry crashed and burned before being rescued by taxpayers and then being re-regulated back into home finance where they have thrived. The commercial banking sector skirted with a government bailout but avoided disaster thanks in part to a strong capital base, decent management, and a regulatory regime (William Seidman and the Federal Deposit Insurance Corp.) that recognized a serious problem and moved quickly before the entire forest burned down.

The Outlook: Concerns in Multifamily?

Even though commercial mortgage banking appears to be on a steady keel that doesn't mean there aren't concerns. At $54.1 billion multifamily is the largest sector in commercial finance, accounting for 29% of all loans funded. The office market is the second largest niche at 22% with retail a close third at 21%. (See table.)

Because the U.S. economy is somewhat strong and unemployment is under 5.5% it seems logical that the apartment market should be good. But the boom in residential finance has harmed the cash flow prospects of owning a rental building because many renters have been converted into single-family home owners, be it a detached home, townhouse, or condo unit. The U.S. home ownership rate is at an all time high, which in theory, should hurt the multifamily market but really hasn't a whole lot.

Many real estate economists have been carefully watching the growing imbalance between stagnant rental rates (in some markets) and rising home prices. Of course, there is one exception to the "stagnant" rent issues, New York City and the five boroughs, where the apartment vacancy rate is at 2% and the concept of an affordable rental has long been extinct.

But something else is afoot as well. Apartment buildings can be converted into condominiums which puts these dwellings into the category of single-family units. According to research done by Witten Advisors, Dallas, 60,844 rental units were purchased by investors in 2004 with the intent of converting the dwellings into condos. A year earlier just 15,806 units were brought with such an intent. Anyone who lives in Boston, Los Angeles, Miami, New York and other urban areas can tell you about the rising tide of condo conversions. Conversions have aided the multifamily market, preventing a softening in the sector. Also, because home values have risen so dramatically the past four years it is now much cheaper to rent in certain markets (San Francisco is a good example) than to own.

So, is the multifamily market headed for a fall? Not likely. It could slow, but not to the point where commercial mortgage bankers have to worry about defaults. There is one thing to keep in mind: stock market returns continue to be weak, and real estate is "real." If a stock tanks and the investor sells he or she loses money. If an apartment building goes down in value the owner can still rent out the rooms. There will always be renters. It's just a question of price.

Commercial Rankings

It has never been easy getting a handle on the commercial mortgage market. The Federal government —including all the Federal banking agencies — does not require insured lenders to report their commercial mortgage originations on any type of regular basis. At best, the Federal Deposit Insurance Corp., and Office of Thrift Supervision require their banks/thrifts to report on-balance sheet (portfolio) holdings, but new loans originated (be it a purchase money loan or a refinancing) escape the scrutiny of the Feds.

In this chapter we rank the nation's top commercial mortgage lenders and servicers. The rankings are based on exclusive surveys sent out by National Mortgage News for this edition of the Mortgage Industry Directory. The results will be affected by the fact that some commercial firms would not respond to our surveys. (Firms that did not respond were called at least twice and asked to send in a survey.)

It won't surprise readers to see that GMAC Commercial of Horsham, Pa., ranked first among all commercial funders in 2004 with a production volume of $22.5 billion. GMAC's loan volume fell by 15% compared to the previous year which isn't bad considering the company had to deal with the debt rating woes of its parent, General Motors Corp., the ailing automaker. (GMACCM is a major player in the multifamily market.)

Money center bank Wachovia, Charlotte, N.C. ranked a close second with $21.7 billion, a slight increase from 2003. The closeness in the rankings is indicative of not just Wachovia's success, but again, GMACCM's troubles. We provide commercial funding figures on 98 other lenders as well. The profiles that follow the rankings provide detailed information on what types of commercial real estate loans these firms are willing to fund and at what debt levels. If your firm was left out of these rankings or you know of any lenders that aren't on our radar screen drop us a line. As always our goal is to have the most complete coverage as possible. — Paul.Muolo@SourceMedia.com.