Inflation has caused a number of commercial real estate lenders to scale back on how much money they are willing part with, GlobeSt.com reports. The Mortgage Bankers Association predicted industry lending would decrease 18 percent after the second quarter of this year, compared to 2021. The organization was correct, according to CBRE.
“The Federal Reserve’s hawkish stance to reduce inflation resulted in higher borrowing costs, more conservative underwriting and lower loan closing volume in Q3,” the organization wrote. “The CBRE Lending Momentum Index fell by 11.1 percent quarter-over-quarter and 4.7 percent year-over-year in Q3.”
Recent figures back up the study that CRE lenders are proceeding with more caution. For example, high profile lending agencies like Freddie Mac and Fannie Mae were at $30.6 billion — an 8.4 percent drop from the $33.4 billion loaned during the second quarter.
Meanwhile, banks made up almost 47 percent of non-agency CRE loans, GlobeSt.com reports. It’s an increase from the 38.1 percent reported during the second quarter and twice what was registered during the third quarter of 2021. However, banks are expected stay cautious and put more of their attention on permanent loans while mixing in bridge and construction loans.
Other lenders comprised about 32 percent of the non-agency loans, matching second quarter figures, but 6.7 percent less from the same time frame last year.
“Rising spreads and interest rate cap costs have made some value-added floating rate deals more difficult to execute,” the report said. “CLO issuance slowed to a trickle, with only four deals totaling $3.39 billion in Q3.”
What’s ahead for CRE lending
Various loan types have had difficulty remaining consistent, GlobeSt.com reports. Last year, life insurance companies made up 20.1 percent of non-agency loans and increased to a little more than 26 percent during the second quarter. The number then fell to 16.7 percent by time the third quarter came around, however. CBRE believes life companies will become more selective as they fill their yearly allocations.
Meanwhile, commercial mortgage-backed security (CMBS) loans decreased significantly. They comprised almost 18 percent of non-agency loans during the third quarter of 2021 and now just 4.6 percent.
“Industrywide CMBS origination volume fell to $13.3 billion in Q3 2022 from $20.8 billion in the previous quarter and $29.2 billion in Q1 2022,” CBRE said. “CMBS spreads have widened, making loan quotes less competitive.”
Loan-to-value (LTV) ratios in loans have also dropped, while interest rate caps and debt yields have gone up, GlobeSt.com reports. It’s a sign that lenders believe the industry is on uncertain ground right now. CBRE noted that an average of 63.8 percent of loans had interest-only terms during the third quarter of this year — evidence that the risky maneuver was the only way many borrowers could get a deal done.
Despite the recent drops in CRE lending, the Mortgage Bankers Association projects that borrowing and lending will eventually get back on track in 2023 — reaching $872 billion industry-wide. While less than the numbers reached in 2021, it would still be a good improvement.