Six Reasons to Think Small

When CBRE Capital Markets announced in April 2015 that it was signing on to Freddie Mac’s new Small Balance Loan (SBL) program, many were surprised. Why would Freddie Mac’s largest seller (with $9 billion in originations that year alone) join a program designed for multifamily borrowers seeking loans as small as $1 million?

Opportunity, of course.

Small multifamily housing supports a vital group of American renters — those in the country’s workforce. Many of the units that are financed through the SBL program are rented to people who serve the community, such as teachers, nurses and firefighters. As rent costs rise near major employment centers, the need for affordable workforce housing becomes greater than ever.

The loans offered through the SBL program are tailored to the needs of workforce housing borrowers. Funding is provided in amounts from $1 million to $6 million in all markets and up to $7.5 million for some properties in larger markets. Loans are non-recourse with 30-year amortization and offer flexible term structures including fixed rates for five, seven or 10 years and hybrid fixed-to-float terms up to 20 years. In addition, the offering allows for partial- and full-term interest-only payments and includes a variety of stepdown prepayment options.

Supporting the workforce housing market is a top priority for Freddie Mac. In fact, nearly 90 percent of Freddie Mac Multifamily loans finance housing for low- and moderate-income renters. By this important measure, the SBL Program has been a resounding success. In the past two years, Freddie Mac has funded more than $6.3 billion in Small Balance Loans, providing financing for more than 75,000 low- and very low-income units nationwide.

So the opportunity for the country’s workforce, for small multifamily borrowers and for Freddie Mac is clear. But why did commercial giant CBRE choose to go small?

Reason #1: Huge Market
For every one large multifamily loan, there are approximately three loans in the $1–6 million range. Smaller loans represent roughly $80 billion in annual originations, making it a segment that simply cannot be ignored. With the Small Balance Loan, Freddie Mac has created a competitive offering that is expected to attract an increasing portion of this market in the coming years.

Reason #2: Small Leads to Big
The typical Small Balance Loan borrower owns between three and eight properties for a total of 50–300 units. The loans allow them to increase their holdings, either through acquisition or through increased leverage via refinance. As their portfolios grow in size, these borrowers become potential clients for CBRE’s conventional lending products. Through the SBL program, CBRE can initiate relationships that will lead to long-term profits.

Reason #3: Workforce Housing is a Stable Market
Because SBL properties are typically older housing stock, the supply is less directly affected by variations in construction starts and other market fluctuations. And price and availability at the top end of the multifamily market may shift as households assess whether to rent or buy, but the demand for affordable rental housing is steadier at the lower end of the income scale.

Reason #4: Connecting Debt and Investment Sales
CBRE Capital Markets’ Investment Properties brokers often represent the sellers of properties that fit the Small Balance Loan profile. Partnership with a CBRE SBL producer offers advantages for all — potential buyers have access to high-leverage loans, increasing the funds available for a bid; the producer can provide a more streamlined lending process through cooperation with the selling broker; and the broker and seller receive greater certainty of close. In addition, as CBRE producers build relationships with new borrowers in the small multifamily space, they will be able to identify and refer potential buyers back to CBRE’s brokers.

Reason #5: The CBRE Advantage
As the largest of the seller/servicers in the Small Balance Loan program, CBRE has economies of scale that are unavailable to its competitors. For instance, CBRE is able to offer below-market pricing on third-party reports and processing. CBRE can also draw on its global resources and local knowledge for unique market insights and highly accurate underwriting. And CBRE’s best-in-class closing team provides the same quick and efficient service for Small Balance Loans as they do on the conventional side. The combination gives CBRE a strong advantage within the program and in the market overall.

Reason #6: CBRE’s Relationship with Freddie Mac
And last but not least, relationships matter! CBRE originated more than $10 billion in multifamily loans for Freddie Mac in 2016 and has been the lender’s top overall seller/servicer for the last eight consecutive years. That’s a lot of experience in working together with Freddie Mac to find financing solutions for multifamily borrowers. By participating in the Small Balance Loan program, CBRE was able to demonstrate that what is important to Freddie Mac — workforce housing — is also important to CBRE.

Clearly, the decision to join the SBL program has paid dividends for CBRE. After only two years, CBRE has already originated more than $1.2 billion in Freddie Mac Small Balance Loans. Despite being new to the small loan market, CBRE is quickly gaining on its SBL competition and finished 2016 as one of the program’s top 3 seller/servicers. Working together, CBRE and Freddie Mac look forward to quickly reaching the $2 billion mark.

To learn more about the program, please visit for program details and to find a seasoned Small Balance Loan expert in your market.

By: Dan Winzeler, managing director, Business Lending, CBRE Capital Markets, and David Cardwell, senior director, Small Balance Loan Production, Freddie Mac Multifamily