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The commercial real estate lending market remained strong through the first quarter of this year, despite volatility created by the Federal Reserve’s rate hikes and geopolitical events. In fact, lending activity appears on track to surpass not only 2021 levels, but activity recorded in pre-COVID-19 years, say industry experts who track debt and equity flows. For example, loans originated and closed by commercial real estate services firm CBRE in the first quarter increased by 69 percent year-over-year, according to the firm’s Lending Momentum Index. They were also 5.5 percent above the fourth quarter of 2021.
“Last year was a blockbuster year for bridge loan securitizations,” says Deryk Meherik, senior vice president at Moody’s Investors Service who is focused on floating-rate, short-term loans securitized into CRE-CLOs. He points to two reasons for the major uptick in loan activity in 2021. First, CRE-CLO deals proposed in 2020 closed in 2021, adding to more loan origination activity last year. Second, there was a significant increase in new issuers and investors in this space, which has been growing since 2017 and continues to influence activity in the debt market.
In 2022, loan origination activity is on track to beat last year’s figures, says Rachel Vinson, president of debt and structured finance, U.S., with CBRE. Generally speaking, activity in both the debt and equity markets is exceeding pre-pandemic levels this year, she notes. Although the market has changed rapidly due to rising interest rates and the impact from the war in Ukraine, the current abundance of debt and equity capital looking for a home is a telling sign of a healthy commercial real estate market, Vinson adds.
Better loan terms—including mortgage rates and proceeds—are available for multifamily and industrial assets, despite negative leverage in today’s environment, according to Brian Stoffers, global president of debt and structured finance with CBRE. But he notes that debt capital is available for virtually all asset classes.
“The interest rate hike from the Fed is already priced into the forward curve, affecting floating-rate debt, as these deals typically require a rate-cap purchase,” notes Vinson, adding that some sellers are bringing forward transactions now to potentially avoid any future value loss resulting from rising cap rates. Lenders remain very active with ample capital, albeit at higher rates, she adds.
Banks captured 27.5 percent of commercial real estate loan activity in the first quarter of the year, down from 39.3 percent of market share a year ago, with bridge and construction loans accounting for two-thirds of bank financing, while permanent loans accounted for the remaining one-third.
Life insurers increased their market share of closed, non-agency loans from 19.2 percent to 26.3 year-over-year. The majority of these loans involved permanent, fixed-rate loans. CMBS conduit loans accounted for the remaining 3.5 percent of non-agency loan volume in the first quarter, down from 11 percent a year ago.
However, industry-wide, CMBS issuance more than doubled in the first quarter of this year, increasing from $10. 2 billion to $20.8 billion, the CBRE report notes. CMBS conduit loans, however, only accounted for 3.5 percent of non-agency loan volume in the first quarter, down from 11 percent a year ago.
CRE CLO issuance
CLO issuance also nearly doubled from the first quarter in 2021, according to CBRE data, from $8.9 billion to $15.2 billion. These deals were primarily floating-rate, multifamily bridge loans with an average term to maturity of 43 months.
“CLO activity increased because it is a funding mechanism for the plethora of debt funds that have emerged over the past several years,” notes Stoffers. “Debt funds have become a very large source of alternative lending, typically doing value-add multifamily, with some activity in other sectors like hotel, office and retail.”
Historically, banks have been the ones to provide CRE CLO financing, but alternatives lending groups, many of which use CLOs to term finance their loan portfolios, represented 42.7 percent of CLO market share in the first quarter, CBRE reports. That’s up from 30.6 percent a year earlier.
Value-add, garden-style multifamily properties, located primarily in Sunbelt states, represented the majority of bridge loans being securitized in CRE CLOs, about 70 percent, says Meherik, who suggests that the increase in attention to this product type may be in response to the push to provide workforce housing.
Office, especially flex-office, represented the second largest asset type in this debt space, followed by distribution centers, according to Meherik, with the remaining CLO debt capital going toward hospitality and industrial projects.
Last year, CRE-CLO and Single Asset Single Borrower (SASB) loan originations surpassed CMBS conduit activity, but Soffers says that activity for all three loan types has slowed recently due to increasing spreads and rising rates.
What are the terms?
Interest rates and loan-to-value (LTV) rations on CMBS loans are often impacted by the product type and the tenant of the property supporting the loan, according to Robb Paltz, associate managing director at Moody’s who tracks the CMBS market. “Issuers and investors recognize that multifamily properties traditionally have lower risk credit profiles, while discretionary retail often has potential for higher cash flow volatility,” he says.
Regional malls are still considered to be the riskiest retail property type by lenders because tenants depend on discretionary consumer spending, resulting in higher interest rates, Paltz adds. Meanwhile, strip centers, with “non-discretionary” retail tenants like grocery stores or other essential products and services providers, typically can expect better terms.
Similarly, well-located, high-quality office assets with strong tenants and long-term leases are viewed as having relatively low risk credit profiles by capital markets, he notes. In contrast, office properties with high vacancies or substantial upcoming lease expirations are treated with much greater caution.
With lending conditions tightening early in the quarter, spreads on closed 7- to 10-year fixed-rate commercial loans with 55 to 65 percent LTV ratios fell by 27 bps quarter-over-quarter to an average of 158 basis points. Spreads on multifamily loans tightened by 29 basis points to an average of 144 basis points. However, April loan quote data for similar deals indicated that spreads have widened again by 35 to 50 basis points.
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