Nonbanks gain upper hand in commercial real estate lending

As banks withdraw from commercial home lending amid concerns about the impact the pandemic will have on retail and office property utilization, alternative lenders have emerged as the largest source of new credit.

In the third quarter, private debt funds and other alternative lenders accounted for 39.1% of all CRE procurements, according to new data from the CBRE Group, up from 34.9% a year earlier. Commercial mortgage-backed securities conduits also saw strong growth. Banks had a market share of 23.1%, compared to 38.3% in the previous year.

“Debt funds really got into full swing in the second half of 2020 amid the pandemic when banks were largely marginalized,” said Brian Stoffers, global president of Debt and Structured Finance at CBRE.

For years, non-bank lenders have used aggressive underwriting tactics to generate high returns on commercial real estate loans and have gained ground against banks. When the COVID-19 pandemic emptied office buildings and closed retail stores in the United States, the trend accelerated.

The banks themselves are often the source of funding for this debt, Stoffers noted. He said that while banks could resort to commercial home lending, they could do so through alternative lending channels that would keep the new balance in the market.

Overall, commercial real estate lending is showing signs of strength – despite some uncertainty as to whether recent trends, such as the need for less office space in the wake of ongoing home office arrangements, will prove permanent.

The CBRE index for commercial property lending rose 31.6% in the third quarter from June, more than doubling year over year. The index is also 29.1% up on its February 2020 level, just before the COVID-19 pandemic.

Bank executives are keen for a broad rebound in credit growth over the next year, but increased competition from non-bank lenders could make it more difficult to get such a boost in commercial home lending.

“Commercial real estate is getting more competitive,” said Terrance Dolan, chief financial officer of US-based Bancorp, with $ 567 billion in Minneapolis, in a recent interview.

Nevertheless, Stoffers said: “Banks will start with new allocations and target volumes to be achieved in 2022.”

Two parts of the commercial real estate market are booming: loans for multi-family and commercial real estate. According to a report by Moody’s Investors Service on October 19, the volume of industrial property-backed loans in non-bank portfolios more than doubled between December 2019 and June 2021.

But in other parts of the commercial property market, including the office and retail sectors, “many banks have spoken of continued reluctance to raise their balances sensibly over the next year,” Fitch Ratings analysts wrote in a November 5 report.

Office-covered loans were the only part of the commercial real estate market where new lending fell between December 2019 and June 2021, according to Moody’s.

“The popularity of remote work agreements has increased and with it the question of the role of offices after the pandemic, which makes it likely that this type of property will have more vacancies in the next few years,” the analysts from Moody’s write in the report.

Moody’s anticipates a “fairly stable” development in office loans for the next 12 to 18 months, also because many tenants have concluded long rental agreements. To protect themselves from a more severe downturn, debt backers, who often have large exposures to the office sector, have generally amassed additional reserves.

An alternative lender, real estate mutual fund Apollo Commercial Real Estate Finance, “has increased confidence that the market has sufficient liquidity to support underlying assets as they continue to face pandemic headwinds,” analysts reported on on Thursday BTIG, which recently hosted a fireplace chat with the company.

There are niche areas of commercial real estate that are well positioned to see growth in new issues over the next year, Stoffers said. Bridging loans, which tend to be relatively short maturities of three to five years, are growing in popularity and even some areas of the office market can be a source of new growth, he said.

“In general, well-rented core office loans are in great demand at the moment,” said Stoffers. “Less with office loans in the suburbs.”