Commercial Lending: A Second Wind?

Lending volume, as measured by the CBRE Lending Momentum Index, closed in September well above June’s level. Compared with a year ago, the index is up by 13.1%.

Despite the trend of higher interest rates and lower loan refinancings, demand for CRE debt remained strong, supported by an increase in sales transactions in Q3.

The Fed’s additional short-term interest rate hike in September to a target range of 2.0% to 2.25%, along with investors’ concerns over rising inflation and deficits, caused an expansion of the yield curve. Another short-term rate hike by the Fed is likely in December. 

The benchmark 10-year U.S. Treasury settled above 3.2% in early October, approximately 40 basis points (bps) above its close at the end of June. Despite this, credit spreads on seven-to 10-year fixed-rate commercial and multifamily loans held steady. 

After a favorable start to 2018, CMBS issuance slowed by midyear. As of mid-October, year-to-date issuance totaled $63 billion, down from $68.2 billion for the same period in 2017. 

The agency multifamily sector remains stellar. Year-to-date through September, combined Fannie Mae and Freddie Mac multifamily loan purchase volume totaled $90.7 billion, just shy of the record-setting pace of $91.6 billion for the same period in 2017. 

CBRE’s broad loan underwriting measures were slightly more aggressive in Q3. Overall debt service coverage ratios fell slightly, while LTV ratios inched higher. Debt yields and underwritten cap rates fell. In addition, the percentage of loans carrying either partial or full interest-only terms increased to 66.2% from 61.0% in Q2.

Source: "Commercial Lending: A Second Wind?" CBRE. Q3 2018 U.S. Lending Figures. Web Nov 7, 2018.