WASHINGTON, DC—A majority commercial real estate lenders expects that new lending volume will peak for this cycle in 2016 or 2017, according to the forthcoming Spring 2015 RELA-Chandan Survey of Commercial Real Estate Lender Sentiment.
Specifically, 39% of lenders expect peak lending in 2016, while a further 36% expect the peak in 2017. Only 17% believe that volume will continue to grow into 2018 or beyond.
Either way, it is widely understood among the respondents what will follow after that peak, whenever it may occur: slower growth in sales transactions and refinancing activity. Tightening underwriting standards and slowing borrower demand. And muted risk appetite in the capital markets.
GlobeSt.com received the report on an exclusive basis. It will be released this week.
The findings are significant given the survey base: A semi-annual report, RELA—Chandan Survey of Commercial Real Estate Lender Sentiment queries domestic and foreign banks, life companies, agency lenders, CMBS conduit lenders, and private and other non-bank lenders on their expectations for mortgage origination volume, underwriting standards, and loan pricing in the US multifamily and commercial property sectors.
It's a good mix of capital market players, in other words.
"We Can See A Recession"
Back to the findings: like most cyclical peaks, they do not bode well for the longer term. Unless the survey results prove to be an outlier, Sam Chandan, president and Chief Economist of Chandan Economics, tells GlobeSt.com, "we can foresee a period of significant economic stress -- a recession -- at some point during the next three or four years."
This will have an impact on loans originated in the current environment.
"Today's five-year loan may not mature in an environment of higher interest rates; instead, it could mature just as the economy is reaching its cyclical nadir," he says.
Tighter Underwriting, Fading Risk Appetite
According to the survey, lenders expect that underwriting will begin to tighten with a lag on volume; some 31% of respondents believe that tightening of lending standards will begin in 2018 or later.
Appetite for risk taking is also fading compared to sentiments from the previous survey in the Fall: across all property and loan characteristics, the net share of lenders projecting an increase in risk appetite fell to 4% in the Spring 2015 survey, down from 19% in the Fall 2014 report.
Higher LTVs; Slowing Loan Demand
The responses suggest that loan-to-value ratios at origination will trend higher over the next year, the report says.
The responses also suggest that lenders are poised to pull back on debt service coverage and debt yield, although this could also reflect their updated expectations for rate tightening over the next year.
Finally, the net share of respondents projecting an increase in demand for term loans declined to 14%, down from 37% in the Fall 2014 survey. The net share for construction loans declined to 14% as well, from 27%.
Lenders' Balancing Act
These events are a few years off but Chandan says their effects are being felt now.
"Attention had been focused up to now on higher interest rates," he says. "More prudent lenders are also assessing how their loans will perform should economic and financial stresses rise significantly.
At the same time, lenders are facing competitive pressures in the current environment. "Lending standards are loosening even as cyclical risks increase and are only projected to tighten with a lag on lending volume," he says.
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