Some Debt Players Still Active Even in Rocky Market

The debt markets have proven to be more stable in this pandemic-triggered recession than in the Financial Crisis of 2008, but the market is still rocky. At the start of the pandemic, key debt players pulled back, largely eliminating the debt portion of the capital stack, according to a report from Real Capital Analytics. This made asset pricing and capital challenging to secure.

Still, RCA’s Jim Costello writes, there is debt available to commercial property investors in this downturn. “Bank lenders in particular are still in the game and, with the pace of acquisitions falling, refinancing activity dominates originations.”

Debt availability, though, has clearly scaled back. As it did during the Financial Crisis, CMBS has pulled back from the market, down 95% according to the Mortgage Bankers Originations Index, although the move did not have as substantial of an impact on asset pricing during this recession. Investor-driven lenders, a group that had expanded rapidly during the last business cycle, have also dramatically reduced their market share. While it hasn’t decreased activity as sharply as CMBS lenders, their decrease in originations has reduced the availability of high-octane debt, according to the Real Capital Analytics report.

The Mortgage Bankers Originations Index notes that mortgage originations are 48% lower in the second quarter year-over-year and 31% lower than at the start of the year. Of course, the market is also bifurcated by asset class. Retail and lodging properties performed much worse among lenders—down 91% and 74% respectively—than multifamily and industrial assets, which had a 24% and a 44% decline in lending activity, respectively. Like the RCA report, the MBA Originations Index also showed the most activity and resilience in the GSE market. However, all property types reported a decline in originations.

As Costello noted, there are still debt players that are active, namely the banks and the GSEs. GSEs were responsible for 30% of originations in the second quarter, leading the market for lending activity. Banks focused largely on refinancing activity, but the pace of transaction activity is still significantly lower than pre-pandemic levels.

Reduced debt capacity and lending activity was a significant factor in the severity of the Financial Crisis, with falling asset prices prompting lenders to withdraw from the market, much like today. Then, the lack of debt forced prices down even lower, triggering a downward spiral.

While part of this cycle appears to be emerging once again, the RCA All-Property Index CPPI was down only 1.5% year-over-year in July. This shows more stability in the market, at least for now, Costello says. Like many research outlets, RCA is expecting more deteriorating fundamentals in the coming months. However, the firm does not expect the debt markets to play a role in those declining fundamentals.