Business Actual Property Lending Slows in This fall 2022

Business Actual Property Lending Slows in This fall 2022

Heightened market volatility amid higher interest rates continued to dampen commercial real estate lending in the final quarter of 2022, according to CBRE’s latest study.

The CBRE Lending Momentum Index, which tracks the pace of CBRE-initiated commercial loan deals in the U.S., declined 15% compared to the third quarter of 2022 and 27% year-on-year. The index closed the fourth quarter of 2022 at 305.

Chart showing the CBRE Lending Momentum Index from December 2009 to December 2022

“The US Federal Reserve’s pledge to lower inflation through aggressive rate hikes continues to add to market uncertainty as borrowing costs rise and the lack of price discovery continues. While there is plenty of available debt waiting to be used, fewer borrowers are willing to transact when they don’t have to,” said Rachel Vinson, president of Debt & Structured Finance, US for Capital Markets at CBRE. “We are seeing increased activity from private capital and from regional and local banks. We expect demand for shorter-dated, fixed-rate debt with reduced call protection to continue well into the second half of 2023.”

Banks accounted for the largest share of CBRE’s loan originations at 58.3% for the third straight quarter, up from 46.4% in the third quarter of 2022. More than 80% of bank loans were floating rate. Construction loans accounted for 37% of total bank lending, followed by 36% for refinancing and 27% for acquisitions.

Chart showing lender composition in Q4 2022 compared to Q4 2021

Life insurance companies were the second most active lending group in Q4 2022, accounting for 21% of non-agency loans completed, up from 16.7% in Q3 2022. Industrial transactions accounted for more than half of life insurance company volume in Q4 2022, while Apartment buildings accounted for 22%.

Alternative lenders such as debt funds and mortgage REITs accounted for 18.7% of loan originations in Q4 2022, a significant decrease from their 32.3% share in Q3 2022. Higher spreads and interest rate cap costs created a difficult environment for financing variable rate bridge loans. Issuance of collateralized loan obligations (CLOs) was capped at $2.95 billion in Q4 2022, bringing the 2022 total to $30.3 billion — down 33.3% from 2021.

CMBS conduit loans represented 2.1% of non-agency lending volume in the fourth quarter of 2022 — up from 18.5% a year earlier. Industry-wide CMBS issuance was capped at $6.95 billion in the fourth quarter of 2022. For the full year, CMBS issuance was $70.23 billion — down 36.5% from 2021. CMBS spreads have widened, making loan offerings less competitive.

Higher mortgage rates and credit constants were the main feature of the criteria for lending in the fourth quarter of 2022. Yields on assumed debt and closed loan limits increased in the fourth quarter of 2022. Meanwhile, the average loan-to-value ratio (LTV) rose 0.3 percentage points from the previous quarter. The share of loans with pure interest terms remained high and rose to 72.6% in Q4 2022.

Lending to multifamily assets by government agencies totaled $47.1 billion for the fourth quarter of 2022, compared to $30.6 billion for the third quarter of 2022. For the full year, volume was $142 billion – a slight increase from $139.6 billion in 2021.

CBRE’s Agency Pricing Index, which reflects average agency fixed-rate mortgage rates for seven- to ten-year closed-ended term loans, increased 60 basis points (bps) and 193 bps year-on-year to average 5.21% in the fourth quarter of 2022.