Slowed Commercial Acquisitions in U.S. Dampens Lending Activity in Q3
According to new research from CBRE, a surge in loan applications in the past few weeks has a promising sign of higher year-end closings, while sluggish commercial real estate investment has caused loan closings to slow in Q3 2020.
The CBRE Lending Momentum Index, which tracks the pace of commercial loan closings in the US, fell to 160 in September, down 17.6% from June. In September 2020, the index was down 39.4% year over year.
“Stabilized apartment buildings continue to receive strong agency support as banks and life insurers continue to conclude multi-family, industrial and selective office transactions with less leverage. Retail and hotel properties, as well as properties with transition problems, remain difficult to draw. The promising sign was the reappearance of Offered alternative lenders in recent weeks, a source of capital for value-adding real estate and emergencies, “said Brian Stoffers, global president of Debt & Structured Finance for capital markets at CBRE.
CBRE’s Lender Survey shows that banks gave up market share to other lenders in the third quarter of 2020 after capturing over 70% of loan origins in the previous quarter. Banks continued to lead the major non-agency loan groups, capturing 39% of loan closings in Q3 2020. The banks mainly financed permanent loans with a maturity of five to seven years, focused on the multi-family and industrial sectors, with a few select office and retail businesses. Bank lending has mainly been focused on smaller, local and regional banks and credit unions as many of the large money center banks continue to value their existing portfolios.
Alternative lenders (including REITs, financial firms, debt security funds) that had little lending in the second quarter of 2020 accounted for 34% of the loan volume in the third quarter of 2020. These lenders signed a number of multi-family and retail bridge and construction deals in the third quarter of 2020.
Life insurance companies accounted for 22.5% of non-agency loan deals in the third quarter of 2020. This is in line with the last few quarters and a largely low leverage ratio of around 50% of the average loan-to-value ratio (LTV). The majority of these loans were in office, apartment buildings, and retail properties.
Due to the disruption in public capital markets earlier in the year, CMBS closings were minor in the third quarter of 2020. CMBS’s industry-wide issuance was $ 10.4 billion in the third quarter of 2020, bringing the total to $ 40.4 billion year-to-date, compared to $ 58.7 billion last year.
Credit insurance measures became more conservative for the second quarter in a row. The average debt service coverage ratio (DSCR) was 1.59 in the third quarter of 2020 compared to 1.38 in the previous year. The average LTV was 61.5% after 67.2% in the third quarter of 2019.
“Credit underwriting has become more conservative in the current high-risk credit environment. Average long-term commercial and multi-family LTVs fell in the third quarter to levels not seen since the global financial crisis,” added Stoffers.