A view of CRE debt is a window into activity, although with some potential caveats. With all the news of falling transaction volumes, higher interest rates and rate caps, and diminishing valuations without a massive and obvious influx of distress purchasing, one might assume that the amount of CRE debt was falling.
Except, according to a recent Trepp analysis, “The universe of commercial mortgages increased by $320.5 billion year-over-year, or 5.9% from Q2 2022, to $5.8 trillion in Q2 2023, according to the Federal Reserve’s flow of funds,” or the Z.1 report, that the firm compiled.
Multifamily mortgage debt was up 7.1%, $141.6 billion, from roughly $2 trillion to $2.1 trillion in the second quarter of 2023. “Pension plans saw a 23.3% rise in multifamily loans on their books to $3.8 billion,” they wrote. “Other lending sources that contributed to the increase in the inventory of multifamily mortgages were banks and thrifts, which had an increase of 8.8% to $682.2 billion, insurance companies, which saw an increase of 6.3% to $219.0 billion, and the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, which increased 5.7% to $970.6 billion.”
Non-residential commercial mortgage totals were up 5.2%, or $179.0 billion, to $3.6 trillion during the quarter. Pension plans increased their investments in the area by 8.0% to $30.8 billion. Banks and thrifts also increase their exposure to commercial mortgages by 6.6% to $2.2 trillion. Insurance companies pushed up 6.2% to $473.1 billion.
What moved in the other direction were securitization approaches like CMBS in both multifamily and non-residential commercial mortgages. “Securitizations had a decrease of 4.1%, or $3.5 billion, in multifamily inventory and a decrease of 1.2%, or $8.3 billion, in commercial mortgage holdings,” Trepp wrote. “Total securitized commercial real estate (CRE) debt decreased 1.5%, or $11.8 billion, to $780.7 billion.”
Finance companies also reduced their holdings: of commercial by 10.5% to $24.0 billion and of multifamily by 7.8% to $15.1 billion. Total CRE investment was down 9.5% to $39.1 billion, the sum of both the commercial and multifamily reductions.
Also, for commercial, banks and thrifts increased holdings by 7.1% to $2.9 trillion. That was an increase of $191.9 billion. And pension plans were up 9.5%, or $3.0 billion, to $34.6 billion. One takeaway for CRE investors, developers, and owners is that there seems to be shifts in what types of lenders are willing to extend mortgages.