Howard Levine, CEO of ARCS Commercial Mortgage and a 30-year industry veteran, recently captured the feeling among today's leading multifamily lenders with great clarity. “Borrowers' needs have changed. They require a lot more products.” That helps explain why in the past 12 months, several of the industry's largest lenders, including Calabasas Hills, Calif.-based ARCS, have fallen under the acquisition spell.

Driving the buying binge are the nation's largest commercial banks, all in a battle for market share and eager to please their borrowers' demands. Pittsburgh-based PNC Financial Services Group, which ranks No. 12 on NREI's Top Lenders Survey with a total of $11.6 billion in commercial real estate financing in 2006, purchased ARCS in May.

The ARCS acquisition marked a milestone as the largest such acquisition by a commercial bank. ARCS originated more than $2.1 billion of loans in 2006 and services about $13 billion of loans, placing it No. 29 on the survey. ARCS also is the largest Fannie Mae Delegated Underwriting and Servicing (DUS) lender.

“They [PNC] recognized that if they're going to be a player in multifamily, Fannie Mae is an important ingredient,” says Levine. “Obviously they have customers that need Fannie Mae types of products, so you have the cross-selling opportunity. But vice versa, our clients need construction, bridge and mezzanine loans, which we have not been able to provide.”

In August 2006, San Francisco-based Wells Fargo & Co. bought Reilly Mortgage Group. Reilly provides financing to multifamily owners and operators through the lending programs of Fannie Mae, Freddie Mac and the FHA, and has a servicing portfolio of some $10 billion. The Vienna, Va.-based entity is now known as Wells Fargo Multifamily Capital.

These two deals mark the latest chapter in a long-running consolidation saga that is likely to play out for the remainder of 2007, particularly in the multifamily segment, as banks broaden their product offerings.

Organic approach

Banks are taking two paths to adding the commercial small-loan dimension to their capital stack of products. One path is via acquisition, while the other is growing it organically through their existing branch networks.

Both Countrywide Commercial, a division of Countrywide Financial Corp. in Calabasas, Calif., and LaSalle National Bank in Chicago have created internal small-loan commercial real estate operations run by long-time conduit pros Boyd Fellows and Charles Krawitz, respectively. Interestingly, both banks have been recent acquisition targets by other banks.

KeyBank Real Estate Capital in Cleveland is also building its small-loan segment organically. Earlier this year the lender brought to market its first stand-alone small-loan securitization, a $237 million issuance including 156 loans. The largest chunk of loans (34.1%) was strictly multifamily properties with an average loan size of just $1.5 million.

“It takes just as much time to underwrite a small loan as a larger one,” explains E.J. Burke, KeyBank's executive vice president and group head. “The loans in the securitization are great, but it's a very competitive market and we're working on our efficiencies.”

Barbell-shaped business

A recent report from the Council to Shape Change has created a buzz. The council, comprised of 19 independent industry leaders, was formed by the Mortgage Bankers Association as an industry think tank to identify changes in the $12 trillion real estate finance industry over the next five to 10 years.

One key finding was the unique barbell-shaped structure of the industry, featuring large numbers of smaller lenders at one end of the spectrum, a handful of large lenders at the other, and a decreasing number of medium-sized firms with limited growth prospects.

Jamie Woodwell, MBA's senior director of commercial and multifamily research, says there are three potential outcomes for mid-sized firms: failure, success, or become a possible acquisition target.

However, many medium-sized firms, like ARCS, even when acquired, run autonomously. Plus, the industry is still dominated by entrepreneurs who relish the chance to grow enterprises from the ground up.

Over the next five to 10 years, the council notes, “The holy grail of retail banking will be cross-selling a variety of financial products to existing customers. Large players will increasingly offer a full suite of products to meet the needs of any borrower who comes in the door.”