‘Sluggish’ Acquisitions Slow Third-Quarter CRE Lending Activity

“Sluggish” commercial real estate investment activity caused loan closings to slow in the third quarter, reported CBRE, Los Angeles.

The CBRE Lending Momentum Index, which tracks commercial loan closings, fell to a value of 160 in September, down 17.6 percent from June. As of September, the index was down nearly 40 percent from a year ago.

“Stabilized multifamily continues to receive strong support from the agencies, while banks and life companies continue to underwrite lower leverage multifamily, industrial and selective office transactions,” said Brian Stoffers, CMB, Global President of Debt & Structured Finance for Capital Markets at CBRE. He said retail and hotel properties as well as properties with transitional issues remain “challenging” to underwrite.

“One promising sign has been the re-emergence of quotes from alternative lenders in recent weeks, a source of capital for value-add properties and distressed situations,” Stoffers said.

The CBRE lender survey found that banks relinquished market share to other lenders in the third quarter after capturing more than 70 percent of loan originations in the previous quarter. Banks still led the major non-agency lending groups by capturing 39 percent of loan closings. CBRE reported banks funded mostly five- to seven-year permanent loans concentrated in the multifamily and industrial sectors, with a few office and retail deals. “Bank lending has primarily been focused on smaller local and regional banks and credit unions as many of the large money-center banks continue to assess their existing portfolios,” the report said.

Alternative lenders including real estate investment trusts, finance companies and debt funds that did little lending in the second quarter increased their share to 34 percent of loan volume in the third. These lenders closed a variety of multifamily and retail bridge and construction deals during the quarter, the report said.

Life companies accounted for 22.5 percent of non-agency loan closings in the quarter, consistent with recent quarters and largely low-leverage at approximately 50 percent average loan-to-value. Most of these loans were for office, multifamily and single-tenant retail assets, CBRE said.

Commercial mortgage-backed securities closings were thin during the quarter, reflecting the disruption to public capital markets earlier in the year, the report said. Industry-wide CMBS issuance equaled $10.4 billion, bringing the year-to-date total to $40.4 billion compared with $58.7 billion for the same period last year.

Loan underwriting measures turned more conservative for the second consecutive quarter, CBRE said. The average debt service coverage ratio increased to 1.59 from 1.38 a year ago. The average LTV was 61.5 percent, down from 67.2 percent in third-quarter 2019.

“Loan underwriting has become more conservative in the current risk-averse lending environment,” Stoffers said. “Average LTVs for permanent commercial and multifamily loans fell in Q3 to levels not seen since the Global Financial Crisis.”