The outlook for conduit lending activity is improving, and with good reason. CMBS issuance in January hit its highest monthly level since December 2007, supported by increasingly stable corporate and real estate bond markets. The need for credit in support of pending refinancings is concentrated in segments of the market that are not well served by stalwart life companies or the largest banks. Whether to meet these demands or to facilitate new transaction activity, the current revival of securitization is none too soon in coming.
As CMBS volume rises, there are indications that credit quality is coming under pressure. Property economics are mixed, but the supply of credit is picking up while interest rates still linger at historically low levels. Only a minority of market participants believes that systemic distortions from monetary policy may now be doing more long-term harm than good in commercial lending markets. I count myself among this group, but readily acknowledge that the weight of policy opinion is against me.
For all the attention given the CMBS market, banks still account for the majority of commercial real estate lending. For most conventional development projects, they are also unchallenged as the mainstay of construction lending. Not every bank is a commercial property lender, nor has every bank in the sector reengaged. Like their counterparts lending in service of the conduit, however, banks and other balance sheet lenders anticipate rising volume in 2013.
The outlook across banks and CMBS lenders is not always in alignment. Conduits and banks do not exhibit a complete overlap, either in the profiles of their borrowers, their incentive structures, or the market and regulatory environments in which they operate. This heterogeneity is overlooked sometimes in the mass-market discussion of property lending, but is a real feature of the market.
Those differences notwithstanding, banks anticipate originating a larger volume of loans in 2013. Just released by the Real Estate Lenders Association (RELA), the Q4 2012 RELA/Chandan Survey of Commercial Real Estate Lender Sentiment confirms that expectation. More telling, respondents to the survey – who are overwhelmingly balance sheet lenders – indicate that volume will rise because of stronger loan demand by borrowers who meet their still-conservative underwriting standards.
NB: More on the survey results in my next post.