CRE Debt Origination May Have Hit Bottom

CRE debt origination may have reached a bottom, with volume down only slightly at 4.5% year-over-year during the first half after steeper declines in 2022 and 2023, according to Newmark’s Q2 Capital Markets report.

A small decline in refinancings weighed on overall originations, but sale financing made up some of the deficit, the report said. In addition, anticipation of rate cuts impacted originations during the second quarter. Monthly originations in May were above the year-ago pace buoyed by sentiment about future rates.

Industrial originations were up 28% for the quarter and 67% over the 2017-2019 average. Meanwhile, office originations were down 62%, retail originations were down 32% and multifamily originations were down 28%.

At the same time, the number of active lenders continued to decline and is now down 33% from its peak. Unique lenders fell more for office and multifamily and office than for industrial and retail, said Newmark. This reflects concerns about the concentration risk of members. Falling interest rates could entice some lenders back to the market, although many are still contending with existing loans originated at near-zero interest rates, the report said.

Banks remain the dominant source of CRE finance, although their share fell sharply during the quarter across all property types, the report found. Securitized, insurance and debt funding lending trended up.

“Banks are likely to spend the next several years reducing their CRE exposures,” said Newmark. “This would be a negative supply shock to the CRE finance ecosystem.”

The market is set to absorb $2 trillion in debt maturities between now and 2026, and Newmark estimates $632 billion in debt maturing between 2024 and 2026 is potentially troubled.

Investment sales declined 10% during the first half, with office sales backing off after a strong first quarter. Multifamily more than compensated for the decline, said Newmark. Deals under $100 million comprised 65% of volume traded in the past four quarters. Institutional investment rebounded strongly in the 2nd quarter on the back of three large multifamily portfolio deals, notably the acquisition of the multifamily REIT AIR.

Transaction markets are showing clear increases in transaction cap rates, following the public markets. However, both in the private and public markets, cap rates appear unattractive relative to the cost of debt capital with the exception of office REITs, said Newmark.