Today’s post is written by Michael Green, Senior Commercial Loan Originator with Counsel Mortgage Group, LLC. Mike writes monthly on the commercial mortgage market. Check back each month to check his commentary.

Part of MSCI’s recent Periodic Capital Trends Report covering 2023 looks at financing sources that are the most active for different CRE types. (For more, see https://MSCI.com )

Overall, the breakdown by lender type in 2023 was fairly close to that of 2022, excepting a significant increase in government agency funding from 19% to 26%. But that shift was closer to the 2015 to 2019 average of 23%. Also, regional and local banks went from 29% to 26%. A decrease, but still higher than the pre-pandemic average of 17%.

Regional & local banks: When it came to office, regional and local banks were responsible for 37% of the lending. They did 33% of the lending for industrial, 35% for retail, 36% for hotels, and 37% in senior housing. The only area where they were involved much less was in multifamily, offering only 13% of the financing in this category.

National banks funded all categories but weren’t the largest in any one category. They were 12% each in office, industrial, and retail, and 8% in lodging.

The biggest areas for insurance companies were 11% in office, 24% in industrial, and 13% in retail. Other areas didn’t register actual percentages.

There were only two areas where government agencies had a significant presence. That was 58% in apartments and 29% in senior housing.

CMBS showed up as 12% of offices, 11% of industrial, 25% in retail, 21% in lodging, with unlisted percentages in multifamily.

Private and “other” funded in all product categories, but as small percentages not listed.

Loan sizes and LTVs: Government agencies funded average LTV values of 60.5% with an average loan size of $18.9 million. For CMBS, it was $21.7 million average loan size and 55.7% LTV. National bank deals averaged $12.9 million in size at 62.6% LTVs. Regional and local banks had the smallest average loans of $6.6 million, with LTVs of 66.4%. Finally, insurance companies did $20.0 million deals at 58.9%.

Key Takeaways:

1. There’s funding to be had for CRE financing.
2. Solicit loans from the type of lender who has expressed an appetite for your type of property.
3. There was no data given for loans made as a percent of applications processed. Be prepared for numerous rejections.
4. There’s competition for lenders. Lenders will pursue and fund the low hanging fruit first. Have prepared a complete and detailed loan package, and be prepared for a long, detailed underwriting process.

There’s little doubt that CRE financing will be an extraordinary challenge for the next few years as upwards of a trillion dollars of loans become due with interest rates nearly doubled from their origination rates several years ago, cap rates up (prices down), and fundamentals degraded (in many/most sectors and geographic areas). Many borrowers with loans coming due think that because banks are struggling their loan will simply be extended – avoids the write-down. That may be the case, but it’s probably not a good strategy to depend on.

We’ve recently been reminded of the impact of the infamous Black Swan – the economic fallout from the Francis Scott Key bridge in Baltimore is expected to be with us for several years. While our hearts and prayers go out to those directly affected by this tragedy, the economic and financial affects will likely touch all of us months and perhaps years to come.

But now the good news! CRE properties will increasingly become available at distressed prices. However, you may be negotiating with the lender, and don’t count on them offering you financing on a property that they’re taking a bath on! Your bargain price on the property may be seen as off-setting the higher costs of your loan. Bridge loans will do well in this environment – reminiscent of the 2009-2012 environment, and 2002-2004 before that.

Do you really want to go to your lender yourself? Maybe you’d feel more comfortable with a counselor. Whether you’re playing offense or defense, we can help.