DALLAS-With CMBS benched and under harsh review, borrowers can find capital, but the rules have changed in the multifamily market. The well is practically dried up for class B minus and class C assets as are many refinance possibilities for their owners.

The lending chokehold extends to unanchored retail centers, particularly in tertiary cities or struggling inner-urban pockets. “CMBS lenders are sidelined for six months or so. Hopefully, we’ll see life insurance lenders become more active,” Don Farmer, senior vice president of the south central region for Mill Valley, CA-based Bridger Commercial Funding, told developers, bankers and dealmakers at the DFW Apartment and Investment Brokers’ monthly networking meeting at Prestonwood Country Club in North Dallas.

“Is it credit crunch or crisis, depends on who you are. If you are a borrower who needs to refinance, it’s a crisis,” Farmer said. “If you’re a seller, willing to go the agency route, there are some pretty good rates out there. It’s more of a crunch than a crisis for those guys.” He reported that life companies are offering all-in rates of 6.25% to 6.5% and floors hovering 6.25% while commercial banks’ all-in rates range from 6.25% to 7.5%. Agencies’ all-in rates are running from 6.5% to 6.15% and finance companies are ranging from 7.15% to 7.5%.

Farmer reported that $16 billion of CMBS loans are going to mature this year, the bulk of which were booked at a 7.7% interest rate. In 2009, the industry is poised for $19 billion of CMBS debt rollover. Many of the floaters are fully amortized 10-year loans, inked at interest-only terms.

Farmer added some borrowers may have bailed on floating-rate debt by refinancing when fixed rates started to drop. But those who didn’t are facing considerably tougher underwriting requirements that lower class properties most likely aren’t going to be able to meet, he assessed. The new rules of the game require more equity, higher interest rates and no cash-outs. And the latest change has been regional banks are getting creative with interest-rate swaps by “holding the borrower to the term with higher prepayment penalties,” he said.

CMBS loans constitute 24% of the $3.3 trillion of commercial mortgages in the US. Last year set a record in the industry, with $230 million of CMBS loans getting closed as the finale to a three-year run of spiked activity–and then the death knell sounded. “It was all fueled by very attractive rates, terms and a big push to move properties,” Farmer said.

Sean Bushe, regional loan officer for La Jolla Bank, told GlobeSt.com that his territories in Dallas/Fort Worth and parts of California aren’t being as hard hit as would be imagined. The slamming of the CMBS door has opened the market to portfolio lenders like the La Jolla, CA-based bank although he said more equity and higher interest rates are definitely in the new formula. “It’s good from a competitive standpoint. You’ve still got to be cautious,” he stressed, “because you don’t know how bad it will get or when things will turn.”

In Beverly Hills and San Diego, Bushe said the multifamily market’s vacancy rate is 1% to 2%, with monthly rents typically $1,500 for a one-bedroom apartment. “If you want to live there, you must rent. And if you live there, that’s what you’ve got to pay,” he said, pointing out that it’s keeping the deal flow moving in the multifamily arena. In Texas, values and operations are “holding up real well,” he added. “In Texas, at least Dallas/Fort Worth, multifamily for two or three years will be really good.”

Bushe blamed the disappearance of California buyers in Texas as causing the slowdown in sales in Dallas/Fort Worth, which obviously trickles over to his industry. The region’s 10% to 15% vacancy rate is only part of the reason: some are back looking in their home state for value-add deals and others have shifted their focus to other cities due to the changing market.

“The California market wasn’t quite as dominated by the CMBS lending as the Texas market,” Bushe said. “We are doing a lot more business in California than Texas. Everyone still wants to be there.” He pointed out that its multifamily properties have a clear-cut advantage due to the high cost of single-family housing and lenders’ tough stances on home loans.

Farmer stressed the CMBS culprit isn’t its delinquencies, which is just 0.3% to 0.4%. “We are seeing losses based on perception regardless of the performance of the CMBS bond,” he said. “The reality is the delinquencies overall are very, very low.”

Farmer believes CMBS lenders are only sitting on the sidelines until the capital markets calm down. “I think the market’s going to come back. I think 12 months is a realistic time for the market to recover,” he said, adding “hopefully by the end of the year” that the turn will be under way.

In April, CMBS had a 473 basis points spread over the 10-year Treasury: 403 bps on the credit spread and 70 bps for the swap spread. In April 2007, the spread totaled 116 bps: 62 on the credit end and 54 on the swap. Farmer said he believes 250 bps is the benchmark.

Libor is volatile and climbing higher like the US Treasury so the impact in pricing of the swap is widespread. “As for pricing in CMBS, I think the 10-year Treasury will continue to be the benchmark,” Farmer concluded.