CRE Debt Finance's Current Complexity

CRE investment sales have been sinking and disappointing, as MSCI’s overall capital trends analysis for August 2023 showed. As it has been showing for months.

Associated with the sales doldrums are the credit ones. There’s a common assumption that getting financing is next to impossible, with many banks facing risk from CRE loan exposure and tightening lending standards, along with questions of whether the government-sponsored enterprises might not hit their lending caps.

But MSCI basically said to hold on. “Off-the-cuff statements from industry participants might lead one to believe that the commercial real estate markets are in freefall with no debt available,” the firm wrote. “The reality is more complex, however, with some sectors facing illiquidity in the debt portion of the capital stack and others simply facing more expensive debt. Each condition has different implications for investment activity and performance in the coming years.”

Loan originations that the firm tracks were up 31% in the second quarter compared to the first quarter’s pace. “ Typically, factors drive up originations in a second quarter, but from 2013 to 2022, the average increase was only 17%. “Viewed through the lens of a normal second quarter, one might conclude that the market is finished with the slide from a period of excess liquidity in 2021 and 2022.”

Instead of a solid block of change, the numbers varied wildly by category. Multifamily originations in Q2 were $51.2 billion. That was 4% over a pre-pandemic five-year average from 2015 to 2019. Industrials saw the largest increase, with $17.2 billion in originations that were 45% over that property category’s average. For retail, the total was $14.2 billion; that was -15% off the five-year average. Hotels saw $10.7 billion and that was -17% from the 2015-to-2019 average. The biggest fall, as might be expected, was office: $15.1 billion and -52% down.

Looking at both multifamily and industrials, clearly there is some financing to be had. “Still, the benefit of using debt is not as great as in times past,” MSCI wrote. “LTVs at origination have fallen for both sectors as lenders protect themselves from the risks associated with falling property prices. The apartment sector registered a peak in LTVs of 64.5% in 2021, while industrial LTVs peaked at 59.1%. These LTVs were down to 59.4% and 56.1%, respectively, in Q2 2023. Rather than saying no debt is available, for these sectors it may be better to say that there is no cheap debt at easy terms as in the past.”

However, given the drop of office, it is easy to see how the category’s sales and availability of credit for it might move together.