Debt Originations May Have Bottomed

CRE debt organization has continued to slow but has reached a virtually flat position, according to Newmark’s 1Q24 State of the U.S. Capital Markets.

Origination volumes were down only 2% year over year in the first quarter of 2024 — still a drop but a significant improvement over recent patterns. Compared to the 2017-to-2019 period, it’s off by 20%.

The year-over-year breakouts by category of debt origination were as follows: -12% for sales, +4% for refinance, -100% for M&A, -14% for construction. The total though was only -2%. Refinancing stood out in total dollars at $53 billion, compared to the $49 billion in the first quarter of 2023. B]ut the total of $105 billion in Q1 was less than the $107 billion for the same period last year.

Compared to the 2017-to-2019 average, that was -52% sales,+5% refinance, -100% M&A, and -40% construction, for a total of -20%.

“There was a brief window in the first quarter of 2024 when markets believed that rates would come down significantly in 2024, leading to declines in Treasury yields,” they wrote. “Some borrowers took advantage of this window.”

Year-over-year comparisons of originations were down in all property categories except industrial and other. Office fell 54% and multifamily slipped 30%. But industrial originations were up 49% over last year and up 97% in that 2017-to-2019 pre-pandemic average. Retail was down 10%; hotel lost 3%; development sites were -12%; senior housing and care, -23%; and other, which gained 8%.

By lending category, banks were down 30% year over year and government agencies, off by 18%. But other categories were up: CMBS, 237%; financial, 22%; insurance, 31%; and other, 64%. Non-bank sources have ramped up to take over some of the lending that banks did.

Banks also showed a big drop by property category. In the first quarter of 2024, they were down to 19% in multifamily, 56% in office, 34% of industrial, 50% in retail, and 36% of hotels. However, while banks are still tightening standards — which led to the lower percentages of originations by property category — the pace of tightening has slowed. “Most banks expect to continue tightening lending standards in 2Q24; however, the net share tightening came sharply down from a peak of -65%,” Newmark wrote. “This is a salutary development, but it’s still the first step on what is still likely to be a long road to a healthy CRE finance environment. Banks took at best muted steps to resolve issues in their CRE books in 2023, pushing them to 2024. Financial conditions have improved but not enough to resolve most problem loans. As a result, banks will have limited capacity to extend new credit.”