Despite rising inflation and heightened geopolitical risks, Q1 commercial real estate lending activity edged higher, led by alternative lenders, according to the latest research from CBRE.
The CBRE Lending Momentum Index released this week found that lending was up by 69% year-over-year and 5.5% quarter-over-quarter. It now stands 50% above its February 2020 pre-pandemic close. Lending by debt funds and mortgage REITs, in particular, have helped drive the increase.
Brian Murphy, CEO of LA-based Veleta Capital, tells GlobeSt.com that he thinks the CBRE momentum index lines up with what he’s seen through Q1 and into the heart of Q2.
“Despite uncertainty with respect to interest rates while the Fed moves to curb inflation, we’ve seen robust demand for multifamily and smaller commercial assets over the last four weeks,” Murphy said.
“We’ve received more than $800M in new loan requests through the first four weeks since our launch and those requests are heavily weighted in multifamily assets. We’re seeing significant competition in the debt fund space and because of the ever-changing interest rate environment, and it seems like banks are leaning in to capture more of the bridge loan market given the short tenor of the initial loans.
“We expect demand to continue to remain strong, but we do expect historic rent growth to cool off all-time highs post pandemic. Overall, there is still a lot of opportunity for debt funds and balance sheet lenders like Veleta.”
“CBRE’s findings are representative of overall market activity, but in the middle market where many of our clients are focused, we’ve seen substantial bank execution,” Farhan Kabani, Partner, Four Pillars Capital Markets, tells GlobeSt.com. “Deals under $20 million are well-suited for banks and credit unions, and less so for most life companies.
“Going forward, as we see interest rates rise, I anticipate we’ll see another year-over-year increase in debt fund execution, but likely within their historic target deal size. Banks should remain extremely active in the middle market despite rising rates.”
Increase ‘Makes Sense’
William Young, Vice President, EMEA, NavigatorCRE, points out that it makes sense that lending activity would continue to increase, despite more macroeconomic uncertainty than in recent history.
“Rents continue to rise and we have not yet seen cap rates expand in a meaningful way, given the amount of capital chasing fewer deals,” Young tells GlobeSt.com.
“It is expected that traditional lenders [such as banks] grow more conservative in underwriting terms and more discerning in the partners they are working with and the schemes they are lending to in Q2 and beyond, decreasing LTVs, rates increasing—which is expected with central bank moves—and only working with partners who they know. There will also likely be more scrutiny on value-add or speculative projects.”
Young added that debt funds will likely continue to underwrite where banks pull back.
“Since the funds are already raised, the capital needs to be deployed,” he said. “The question will be how successful are these companies at raising net new capital.”
‘We Haven’t Tapped the Brakes’
Paul LeTourneau Senior Manager, Commercial Loan Originations, Alliant Credit Union, tells GlobeSt.com that his firm has experienced “tremendous” growth year to date with volumes up 60% and dollars committed up 98%.
“Alliant has not tapped the brakes at all during the beginning of 2022 despite headwinds of inflation, rising interest rates and ongoing geopolitical risks,” LeTourneau said. “There has been an increased desire in floating rates and our pipeline has more floating rate loans than in the past. However, many of the closed loans and increased volumes were loans where the sponsors wanted to lock in near term fixed rates.”
This year’s origination production has primarily been on multifamily, manufactured housing communities, student housing, industrial and self-storage assets, he says.
Just Like That, Deals Fizzled
But there is clear evidence that a slowdown in lending is waiting in the wings. Mark Perkowski, vice president with Draper and Kramer’s Commercial Finance Group, tells GlobeSt.com that most commercial real estate loans close 30 to 90 days after the deal is underwritten and the rate is locked.
“Loans that closed in Q1 were all sized up in late 2021 when we were experiencing low interest rates and relative geopolitical stability, so origination activity was high,” Perkowski said.
“By contrast, we’re likely to experience a decrease in lending activity in Q2 once closings catch up with the new interest rate environment and the increase we’re seeing in yields and credit spreads.”
Anecdotally, Perkowski said that he left for vacation in early March and had three deals lined up for refinancing via insurance company execution. “I came back to the office 10 days later and, for all intents and purposes, all three loans opportunities had died.
“The economics of them no longer made sense after the benchmark rates increased 37.5 basis points during that time period.”
Industry Players Need to ‘Do Their Homework’
Mark Fogel, president & CEO, ACRES Capital, tells GlobeSt.com that despite the ongoing global and economic challenges, “the time has come for industry players to start doing their homework. Now, things are not so black and white—we have to study, understand and dig deep. Everyone is looking for answers. The uncertainty we face has led many to the safety of the multifamily sector.”
Currently, though, he says the opportunity is no longer there.
“With the amount of capital available to this sector, the ability to enjoy significant returns has passed,” Fogel said.
He said to find opportunities today, it requires employing critical thinking to view these prospects through a different lens.
“Instead of answering this question in terms of asset class or geographic location, I look at whether the project has a smart, experienced sponsor, a fully thought-out business plan, and a well thought out vision, regardless of the asset class or location,” Fogel said.
Multifamily is the ‘Hot’ Sector
That said, there is no denying the appeal of well-performing categories such as apartments. Rich Marshall, partner at Duane Morris, tells GlobeSt.com that he experienced a high level of lending activity during the first quarter of 2022, especially in the multifamily sector.
“While there has been an uptick in interest rates over the past couple of weeks, our lending clients continue to originate new loans and receive requests for proposals on prospective lending transactions,” Marshall said. “It seems this continued trend of activity is due in part to heightened volatility in the stock market, interest rates remaining low historically speaking and the need for affordable housing in light of the ultra-competitive and expensive single family residential market.
“Multifamily is currently the hot CRE sector. On some of my recent Class A multifamily deals on the buyer side, cap rates were in the 4 to 5 range. It seems that a lot of this multifamily activity is driven by the need for affordable housing in light of the ultra-competitive and expensive single family residential market.”
Banks the Second Most Active Group
CBRE reported that lenders such as debt funds and mortgage REITs had the greatest share of non-agency loan closings in Q1 2022 at 42.7%—up from 30.6% a year earlier.
Banks were the second-most active lending group in Q1 2022, with 27.5% of loan closings in—down from 39.2% a year ago. Bridge and construction loans accounted for two-thirds of bank financing and permanent loans accounted for the other third.
Life companies accounted for 26.3% of closed non-agency loans in Q1 2022—up from 19.2% a year ago. The majority were permanent fixed-rate loans with an average term to maturity of 108 months, the report conveyed.
Karen Kepler, partner at Sullivan & Worcester’s Boston office, agreed, telling GlobeSt.com that by expanding beyond traditional options and pursuing innovative and new lending strategies, clients are succeeding in obtaining funding for a wide range of CRE opportunities.”
Brian Good, CEO of iBorrow, tells GlobeSt.com that as a private mortgage REIT, he’s experienced a substantial uptick in demand and originations across product types, including multifamily, value-add office, industrial, mixed-use, retail, self-storage, and destination hotels.
“Due to record-high industry activity and competition, many borrowers require loans to close in less than three or four weeks. We are on track to double our origination volume this year over 2021, and based on the current trajectory, we expect continued rapid growth in the alternative lending space.”