Pandemic Fuels Second-Quarter Dip in CRE Lending

Commercial real estate loan closings fell almost 21% year-over-year in the second quarter, the result of a pandemic-related temporary freeze in lending and transaction markets between mid-March through early April, according to new figures in a CBRE index.

Liquidity returned to the market later in the quarter, and multifamily-agency and certain industrial deals “were bright spots” during the three-month period, the CBRE Lending Momentum Index found. Other sectors suffered, however, as lenders grew more selective in their deal and property-type financing choices.

“While we have seen a steady improvement in the number of loan applications over the past five weeks, we anticipate that commercial mortgage markets will remain muted over the near-term, especially for retail and hospitality properties, as well as value-added deals, which face the greatest underwriting challenges,” Brian Stoffers, head of debt and structured finance for capital markets at CBRE, said in a prepared statement.

“Underwriting will likely remain conservative due to current economic conditions and environmental challenges due to the pandemic,” Stoffers added.

The overall commercial mortgage-backed security delinquency rate rose to just under 6.4% in June, up from 1.2% in March. June delinquencies reached 22.8% in the hotel sector and 17.7% among retail outlets.

Banks were the source of more than 70% of loan originations in the second quarter, a lending share that has more than doubled from recent averages. Much of that growth was driven by regional banks, according to the CBRE report.

Life companies had the second largest share of loan originations with 23%, down slightly from the second quarter in 2019. Most loans in this sector were conseravative with loan-to-value ratios of 60% or less.

Commercial mortgage-backed securities, or CMBS, “conduit lenders struggled to rebuild deal pipelines following the market disruption and the sharp rise in spreads during March and April,” the report found. “In addition, loan underwriting remains challenging. Industry-wide CMBS issuance was close to $30 billion in H1 2020, the slowest pace since 2016.”

Alternative lenders, including debt funds, mortgage real estate investment trusts and finance companies, sourced few loans in the second quarter with some of those lenders struggling with liquidity issues, according to the report.

Across all sources, the average loan-to-value ratio fell, while the average debt service coverage ratio and debt yield rose. 

“The changes in loan underwriting measures reflected the underlying property type composition,” Stoffers said. “While both multifamily and commercial underwriting was more conservative, the overall results were affected by a higher proportion of multifamily loans, which tend to be underwritten slightly more aggressively than commercial ones,”