Signs of Increased CRE Lending Activity Emerge Despite Slowdown
Alternative lenders were the top lending group for the quarter.
While the commercial real estate lending market experienced a slowdown in the first quarter, it was primarily influenced by market conditions in the third and fourth quarters of 2023, according to a new report from CBRE on Q1 lending.
“Looking forward, we are seeing an uptick in activity, particularly driven by institutional investors seeking to recycle capital, with a notable increase in BOV (broker opinion of value) activity and financings over $100 million,” James Millon, U.S. President of Debt & Structured Finance for CBRE said in prepared remarks.
CBRE’s Q1 2024 lending volume increased compared to the same period in 2023. “With investment sales down, we are seeing a shift towards hard maturity refinancings, construction loans, and bridge lending, which is expected to continue until there is consensus on rate cuts,” Millon added.
“While commercial banks are reducing their presence in the market, the combination of agency, life companies, CMBS, and debt funds continues to support credit availability. Credit spreads remain favorable, but the challenge lies in securing accretive financings on core assets due to higher benchmarks.”
Alternative lenders were the top lending group, accounting for 47.2% of Q1 loan volume that was largely driven by bridge lending, CBRE reported.
The rise in loan extensions and potential regulatory challenges drove banks’ non-agency lending share down to 23% in Q1 2024 from 41% in Q1 2023.
Spreads between the 10-year Treasury yield and seven-to-10-year, 55%-to-65%-loan-to-value (LTV) fixed-rate permanent commercial loans tightened by 22 basis points (bps) quarter-over-quarter to 212 and multifamily spreads tightened by 17 bps to 175.
Multifamily agency lending totaled $19.2 billion in Q1, down from $27.1 billion in Q4. Mortgage rates on closed fixed-rate seven-to-10-year agency loans fell by 32 bps quarter-over-quarter and were up by 40 bps year-over-year.
Mortgage rates and loan constants fell by 50 bps quarter-over-quarter in Q1. Debt yields and underwritten cap rates fell to 9.75% and 6%, respectively. The percentage of loans carrying partial- or full-term interest only declined to 75.2% from 77.8%, increasing the amortization rate by 120 bps, according to CBRE data.
The overall average LTV ratio rose by 80 bps quarter-over-quarter to 62.3%. The average LTV ratio for multifamily loans also increased by 80 bps to 63.9%, and that for commercial loans fell by 30 bps to 57.9%.