Commercial real estate lending volume appears to be slowing as the broader U.S. economy cools off from its pandemic-fueled highs.
CBRE Group Inc.’s (NYSE: CBRE) lending momentum index, which tracks the pace of CBRE-originated commercial loan closings in the U.S., declined by 7.9% on a quarterly basis in the second quarter, although it was up 41.1% on an annual basis.
Rachel Vinson, U.S. president of debt and structured finance for capital markets at CBRE, said in a statement the firm expects debt capital to be constrained for the balance of the year as lenders determine how and where to deploy capital. No CBRE executives were available by deadline to discuss commercial real estate lending activity.
Meanwhile, the Federal Deposit Insurance Corp. earlier this month signaled it would exercise greater scrutiny over banks that have significant exposure to commercial real estate loans.
The volume of commercial real estate loans held by banks recently peaked at more than $2.7 trillion, according to the FDIC. It noted while most commercial real estate-concentrated banks felt some stress from the pandemic, loan delinquencies in the sector remain at historically low levels, and aggregate loan losses have been nominal.
Given how disruptive the pandemic was to every facet of the U.S. and global economy, delinquency has been largely staved off as a result of lenders working with borrowers, in addition to stimulus programs and, until recently, the low cost of borrowing.
Where issues may be forthcoming from the pandemic are longer-lasting effects on specific property types because of permanent life and work changes, such as larger adoption and acceptance of remote work. The FDIC says that raises concerns around property values, risk ratings, specific geographic markets, data reporting and other measures.
The FDIC says some banks with significant commercial real estate portfolios haven’t performed sufficient risk analysis, despite having an elevated risk profile.
“Given the uncertain long-term impacts of changes in work and commerce in the wake of the pandemic, the effects of rising interest rates, inflationary pressures and supply-chain issues, examiners will be increasing their focus on commercial real estate transaction testing in the upcoming examination cycle,” according to the FDIC.
A survey of commercial real estate and finance professionals by Trepp LLC conducted between July 13 and Aug. 1 found 83% of participants felt, within the next six months, conditions for commercial real estate and commercial mortgage-backed securities delinquencies will worsen.
In particular, respondents reported feeling pessimistic about the office sector, with 70% saying they feel that property type will see the biggest increase in distress for the rest of 2022. The office delinquency rate has remained low through the Covid-19 pandemic, and was at 2.12% in Trepp’s August reading.
Manus Clancy, senior managing director at Trepp, said the summer has been volatile in attitudes toward commercial real estate. In early June, it was a very confident market, he said, a sentiment that fell off in July as many slammed the brakes in response to the stock market tumbling.
More recently, people have started to come to grips with a slowing economy, and outlooks have started to moderate. Deal volume has accelerated back to early-summer levels of activity this month, he continued, a contrast to the pessimistic outlook when Trepp conducted its survey.
In the equity and commercial real estate markets, the sentiment is almost exuberant right now, he said. He’s seen 15 to 20 transactions of $100 million or more on a weekly basis recently.
“The data doesn’t indicate we’re in this shutdown phase,” Clancy said.
Still, with higher borrowing costs across the board, there’s an underlying feeling some property owners will either have to “extend and pretend,” Clancy said, or may even throw in the towel because they can’t get enough cash to refinance. That’ll push the rate of property distress higher, and will likely be more apparent in a segment like office, he added.
Instead of a tsunami of distress, Clancy said, it’ll be more episodic.
Trepp’s August CMBS delinquency rate saw the biggest drop in six months, following increases in May and June. The delinquency rate in August was 5.64%, compared to 9.02% in August 2021.
Among Trepp’s survey participants, 70.8% reported inflation as a top concern, followed by interest rates (59.7%) and supply-chain constraints (36%). More than half of respondents, or 52.8%, said they felt commercial real estate fundamentals will somewhat worsen by the end of 2022. Nearly half (46.8%) of respondents said they expect commercial real estate sales activity to drop significantly, while 41.2% said they felt leasing activity would remain the same (38.2% felt leasing activity would drop significantly).
“Across all property sectors and geographies, things are happening,” Clancy said. “We’re not looking at a clogged vein right now. We might be a period of modest slowdown compared to six months ago but anyone comparing this to 2008 is really not reflecting (what we’re seeing).”
Want more real estate news? Sign up here for The National Observer: Real Estate Edition.
© 2022 American City Business Journals. All rights reserved. Use of and/or registration on any portion of this site constitutes acceptance of our User Agreement (updated January 1, 2021) and Privacy Policy and Cookie Statement (updated July 1, 2022). The material on this site may not be reproduced, distributed, transmitted, cached or otherwise used, except with the prior written permission of American City Business Journals.
About Author
