Here's Another Capital Source Pulling Back From Lending

In CRE lending, it has been depository banks mentioned as pulling back, worried about falling value of properties that would affect loan values that could undercut the bank’s assets and create regulatory danger.

According to Trepp, though, this is more than an issue for just banks. The major mortgage REITs saw their collective loan portfolios shrink by nearly 11% over the past year, as most had sharply curtailed lending and turned their sights to their problem loans, it found. The reason is that mortgage REITs typically fund relatively short-term loans with floating coupons that are designed to either improve or stabilize commercial properties, Trepp explained. “They and, more specifically, their borrowers were walloped as interest rates spiked and commercial property markets turned against them.”

REITs aren’t regulated the way depository institutions are, but there seems to be a market equivalent of regulation. Trepp has tracked 14 different REITs that originate loans. In 2021, that group had made $49.83 billion in loans. By 2022, the total was down to $30.9 billion. The annual total fell to $4.69 billion in 2023.

The biggest seven drops in loan portfolios — that number because it captures all that saw double-digit declines — were TPG Real Estate Finance Trust (-35.83%); Ladder Capital (-18.80%); Blackstone Mortgage Trust (-18.12%); BrightSpire Capital (-16.52%); InPoint Commercial Real Estate Income (-13.30%); Granite Point Mortgage Trust (-12.60%); and ACRES Commercial Realty (-11.57%).

The second tier of cuts comprise CIM Real Estate Finance Trust (-8.38%); Ares Commercial Real Estate (-7.54%); Franklin BSP Realty Trust (-5.66%); Starwood Property Trust (-5.28%); Apollo Commercial Real Estate Finance (-3.71%); and KKR Real Estate Finance Trust (-1.87%).

The only REIT that saw growth from 2022 to 2023 was FS Credit Real Estate Income Trust, with 9.73%.

“That sharp reduction in originations, along with loan repayments, has led to a reduction in the REITs’ portfolios of mortgages, to $87.51 billion at the end of last year from $98.88 billion in 2022,” they wrote.

In terms of scale, the portfolios total at the end of 2023 is virtually unimportant in the entire commercial mortgage landscape of $5.6 trillion. It also isn’t representative. However, it is notable and “a solid indicator of the troubles property owners might have faced when looking for financing” that “helps explain the sharp reduction in property sales activity.” If investors can’t get financing, they’re not going to buy. And with the short end of Treasurys with yields around 5.5%, it’s a safe route to profit.

When conditions change, the companies will reenter the market. But for now, the REITs will concentrate on reducing troublesome loans and keep their cash for opportunistic investment.