Higher liquidity, tighter credit spreads drove closings.
Commercial real estate lending closed the fourth quarter up 38.2% from Q3, thanks to higher levels of liquidity, tighter credit spreads and a loosening of some underwriting standards, according to new research from CBRE.
Commercial loan closings reached a value on CBRE’s Lending Momentum Index of 221 in December, an amount that reflects a significant increase from the prior quarter but was still down 16% year-over-year.
The non-government agency CRE lending market was more balanced in Q4 and looked a little more like conditions CBRE observed pre-pandemic. It included strong participation from alternative lenders, which accounted for 36% of non-agency loan closing volume in the quarter, and life companies for stabilized low-leveraged loans, which gained momentum in late 2020 to snag a market share of almost 30% in the quarter. Alternative lenders like debt funds, finance companies, and mortgage REITs were also the leading source of bridge loans for the office, retail, and multifamily sectors.
Regional banks accounted for 23.7% of commercial mortgage originations in the fourth quarter, only a slight decrease from prior levels, and also played a key role for construction financing for multifamily and industrial development.
CMBS lenders accounted for a little more than 10% of originations in the quarter, at about $16.55 billion industry-wide in Q4. Average loan-to-value ratios also increased for permanent commercial and multifamily debt.
“Capital markets helped bolster commercial mortgage lending at year-end as equity prices rose and corporate loan spreads tightened. With lending markets anticipating the effects of additional government economic stimulus on growth and inflation, Q4 2020 saw increased participation by alternative lenders and life companies compared with Q3. Certain deals remained challenging to underwrite, especially for retail, hotel and transitional assets,” said Brian Stoffers, Global President of Debt & Structured Finance for Capital Markets at CBRE.
The numbers are heartening, but there may be some cracks in the façade: in recent remarks in Kansas City, Fed President Esther George noted that when government stimulus efforts end, many renters and businesses could find themselves unable to meet their debt obligations, forcing defaults and restricting credit growth.
“Forbearance has been a significant contributor to improved metrics of CRE loan performance,” George said in those remarks. “Still, market analysts predict that a significant volume of commercial loans currently in modification programs may ultimately default. Given this backdrop, a worrying scenario is that the economic impact of the pandemic outlasts the policy support programs currently in place.”
Source: “CRE Lending Rose 38% Last Quarter”