Sluggish commercial real estate investment activity caused loan closings to slow, according to the latest research from CBRE. However, an increase in loan applications has been seen in recent weeks and is a promising sign for higher year-end closings.
The CBRE Lending Momentum Index, which tracks the pace of U.S. commercial loan closings, saw the value decrease to 160 in September, down 17.6% from June. As of September, the index was down 39.4% year over year.
“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. Retail and hotel properties, as well as those properties with transitional issues, remain challenging to underwrite,” said Brian Stoffers, global president of debt and structured finance for capital markets at CBRE. “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.”
According to CBRE’s lender survey, banks relinquished market share to other lenders in the third quarter after capturing over 70% of loan originations in the second quarter. Banks still led the major non-agency lending groups with 39% of loan closings in the third quarter. Banks funded mostly five- to seven-year permanent loans concentrated in the multifamily and industrial sectors, with a few select office and retail deals. Bank lending has primarily been focused on smaller, local, and regional banks and credit unions.
Accounting for 34% of the loan volume in the third quarter were alternative lenders (includes REITs, finance companies, and debt funds), closing a variety of multifamily and retail bridge and construction deals.
Life companies accounted for 22.5% of non-agency loan closings in the third quarter, staying consistent with recent quarters and largely low leverage at approximately 50% average loan-to-value (LTV). According to CBRE, the majority of these loans were for office, multifamily, and single-tenant retail assets.
CMBS closings were thin in the third quarter. Industrywide for the period, CMBS issuance was $10.4 billion, bringing the year-to-date total to $40.4 billion compared with $58.7 billion the prior year.
In addition, loan underwriting measures also have turned more conservative for a second consecutive quarter, according to CBRE. The average debt-service coverage ratio was 1.59 in the third quarter, up from 1.38 year over year. The average LTV was 61.5%, down from 67.2% the prior year.
“Loan underwriting has become more conservative in the current risk-adverse lending environment. Average LTVs for permanent commercial and multifamily loans fell in Q3 to levels not seen since the global financial crisis,” added Stoffers.