There have been any number of indicators that commercial real estate lending has been falling, from anecdotal reports to the Federal Reserve’s senior loan officer survey. Now we can add one more to the list: The CBRE Lending Momentum Index, which tracks the pace of CBRE-originated commercial loan closings in this country, reports lending has fallen 33% in the first quarter from the fourth quarter of last year and 53.5% from a year earlier when loan volume was strong.
Rachel Vinson, President of Debt & Structured Finance, U.S. for Capital Markets at CBRE, explained the drop this way. “The Federal Reserve’s commitment to reduce inflation with aggressive rate hikes continued to heighten market uncertainty through the first quarter,” she said, adding, “While plenty of debt capital remains available, increased borrowing costs coupled with credit tightening continues to put downward pressure on lending activity.” She also predicted that “borrowers will continue to opt for shorter-term, fixed-rate debt with shortened call protection until volatility begins to normalize.”
The Mortgage Bankers Association recently reported similar trends for the first quarter with originations dropping 42% below the prior quarter and 56% down from the same period last year.
“Uncertainty and volatility in regard to interest rates and property values, and supply and demand imbalances for some property types, has led to a logjam in commercial real estate sales and financing markets,” James Woodwell, the Association’s Vice President, Research and Economics said in prepared remarks. But he also offered the important message that more results will provide more clarity. “As loans mature and adjustable-rate loans reset, we should start to get greater insights into where things stand,” he said.
Despite the spotlight on some well-known bank failures, some other banks stayed busy and had the largest share of CBRE’s non-agency loan closing for four consecutive quarters at 41.1%, according to CBRE. That was down from 58% in the fourth quarter of last year, attributable to smaller local and regional banks and credit unions. About one-third of these loans were for construction projects, especially multifamily housing. The remaining two-thirds was split between acquisition loans and refinancings. After banks, life companies represented the second most active lending group in the first quarter of this year with 23% of closed non-agency loans.
Carefully tracked mortgage rates help clarify the increases of late. Average mortgage rates increased by 38 basis points quarter-over-quarter. But loan constants increased by only 13 bps because of an increase in the share of loans that carried partial or full interest-only terms. Underwritten debt yields and cap rates on closed loans rose by 29 bps from the prior quarter to an average of 5.61% while the average loan-to-value ratio increased to 59.9% from 58.2%.