CRE Debt Grows Modestly in Q2

High borrowing costs and rising cap rates have hampered commercial real estate transactions over the last two years. Still, a new report from the Mortgage Bankers Association suggests that investors continue to close deals, albeit at a slower pace.

The report found that outstanding commercial real estate debt rose by 0.7%, or $31.4 billion, in the second quarter of the year, bringing the total to $4.69 trillion. This modest increase indicates that despite the challenges posed by higher borrowing costs, there remains demand for commercial real estate debt in the market.

“Every major capital source increased its holdings of mortgages backed by income-producing properties, but the growth was mixed, with life insurance companies increasing their holdings by 1.8% and banks increasing theirs by 0.2%,” said Jamie Woodwell, MBA’s head of commercial real estate research. “With fewer loans being paid off, CRE mortgage balances have continued to grow in recent quarters despite a marked drop in loan originations.”

Life insurance companies, banks, government-sponsored entities, and holders of CMBS, CDOs, and asset-backed securities all increased their CRE debt holdings. However, overall growth was less than 2%. On the other hand, state and local government retirement funds reduced their exposure to commercial mortgage debt, cutting their holdings by 12.8% in the second quarter.

Commercial banks now hold approximately 38% of all CRE debt, while government-sponsored entities account for 22%, or $1.02 trillion, in outstanding debt.

Multifamily mortgage debt grew slightly faster than overall CRE obligations, rising by 0.9%, or $19.4 billion, to $2.09 trillion compared to the first quarter. This suggests that although deal activity has slowed, interest in multifamily debt remains strong. The lion’s share of new multifamily debt, about $8.1 billion, is held by GSEs in mortgage-backed securities. Banks and thrifts added $4.7 billion to their holdings, while life insurance companies added $4.4 billion.

The increase in mortgage balances, despite reduced loan originations, suggests that existing loans are not being paid off as quickly as before. This could indicate that property owners are holding onto assets longer or facing challenges in refinancing or selling.

On the other hand, the Fed’s recent move to lower interest rates by half a percentage point may end up lowering debt costs for commercial real estate over the medium to long term. Investors may continue to face elevated costs in the near term, with any significant changes in transaction volume depending on how quickly the market adjusts to the new rate environment.