CBRE: Lending Volume Finishes 2016 Strong

Lending volume finished the year strongly as commercial loan closings “surged” in November and December, reported CBRE, Los Angeles. 

“The commercial real estate lending market has shown its resilience throughout the course of the year, which made for a stellar end of 2016,” said CBRE Global President of Debt & Structured Finance Brian Stoffers, CMB. “Life companies and several other capital sources have stepped in as attractive options for borrowers as banks continue to tighten their underwriting standards.”

Stoffers said he expects this momentum to continue at lease through early 2017 “as we wait to learn more about the policies put in place by the new administration.”

The CBRE Lending Momentum Index reached 266 in Q4 2016–the highest level yet–compared to a 100 base established in 2005, a 37 percent increase from the third-quarter level, as well as from the prior year.

Life companies increased their share of loans closed by CBRE Capital Markets the fourth quarter, leading all other major lenders, CBRE said. Life companies accounted for more than one-third of all non-agency commercial closings in the fourth quarter, up from 25 percent in the third quarter and 23 percent in fourth-quarter 2015.

Banks accounted for nearly 28 percent of fourth-quarter loan volume–down from 42.7 percent a year before–CBRE said. “Many key bank interest rates and spreads have not been materially impacted by the recent increases in Treasury rates,” the report said. “However, bank construction lending remains limited and banks are selective in granting loans.” 

Other lenders including real estate investment trusts, private funds and pension funds provided a “significant” amount of bridge, permanent loan and construction financing, CBRE said, noting that these lenders accounted for 24 percent of non-agency lending in the quarter compared to less than 15 percent in third-quarter 2016.

Commercial mortgage-backed securities lenders saw increased closings during the quarter, “but they lagged other major lending groups by a considerable margin,” CBRE said. “Overall industry-wide [CMBS] production was down in 2016 as issuers grappled with a poor spread environment early in the year and with ongoing regulatory issues including risk retention.” CMBS issuers must now retain 5 percent of every new deal issued or find a B-piece buyer willing to take on that risk.

CBRE noted that average spreads on senior commercial and multifamily loans that closed during the quarter remained generally comparable with the prior quarter despite the Federal Reserve’s December interest rate increase. 

“Most market participants believe that the Fed will raise short-term rates three to four times in 2017,” up to 100 basis additional points, the report said; CBRE Econometric Advisors anticipates that the 10-year U.S. Treasury could rise to 3 percent by year-end 2017.

Most key underwriting measures eased in the fourth quarter, CBRE said. More than 67 percent of loans originated carried either partial or full interest-only terms. “Other underwriting measures also became less restrictive,” the report said. “the average debt-service coverage ratio fell while average loan-to-values were relatively stable in the fourth quarter. In addition, cap rates and debt yields reached new lows in the fourth quarter.”