Today’s post is written by Michael Green, Commercial Loan Originator for Counsel Mortgage Group, LLC
CRE FINANCING IS GOING TO GET TIGHT
Yes, I know, after 16 months of increasing rates and continuing QT to the tune of about $1 billion/mo., things are already tight. But did you know …
Over the next 12 months, the U.S. CRE market will wrestle with the reality that three-quarters of a trillion dollars in loans are scheduled to come due. Within the context of $4.5 trillion that is the U.S. commercial real estate debt market, this juncture could be a turning point that shapes the industry for the next decade IF it’s not managed successfully.
The implications of a shortfall in refinancing activity could reshuffle lenders’ appetite for commercial real estate and influence their capital allocations in coming years. One common lending source has been the commercial mortgage-backed securities, or CMBS, market, an active player across most property types that accounts for 13% of the total outstanding debt. The office and retail sectors are the most heavily represented within the $636 billion of unsettled CMBS loans, accounting for a combined 46% of these loans.
Fresh capital is increasingly needed to manage these debts, and new loan originations are evaporating due to recent pricing dislocations in the market.
In 2022, CMBS originations totaled $70.2 billion across the afore-mentioned property types. The latter half of the year, however, saw a sharp decline, a trend that continued into the Q1-23 with a 59% year-over-year decrease.
This lending crunch has been exacerbated by yet another interest rate hike from the Fed – July 26 – by raising its policy rate another 25 bps to a range of 5.25%-5.50%. This move could further impact the borrowing landscape by nudging lenders to take another step toward inactivity.
As the initial swell of loan maturities rises, CMBS delinquency rates remain historically low. Office delinquencies, however, have risen 2.9% since December 2022, and are on par with 2018 delinquency levels at 4.4%.
Borrowers heading toward near-term loan maturities are expected to explore a wide range of lender options before their obligations come due. According to market sources, debt funds and life insurance companies have shown a desire to fill some of the void left by regional banks, which have tightened lending standards and prioritized their depository relationships.
As the scarcity of capital intensifies, lender allocations for 2024 may become depleted in the first half of the year, creating a slow-motion scenario where borrowers compete in a decreasing number of capital pools.
If you’re going to be looking for CRE financing over the next year or 2, you might want to call that mortgage broker you’ve put off calling ‘til now. When things get tight, we get busy. Give us a call.