CRE Debt Is Getting Harder to Find

While debt capital was often unavailable for borrowers seeking refinancing during the global financial crisis, there are still lenders willing to work with borrowers during the COVID-19 pandemic.

So far, that has helped owners avoid fire sales in most property types, according to Real Capital Analytics. But lender appetite for CRE debt has clearly declined.

RCA measured lender pool depth by counting the number of unique originators in each period. It indexed the number of unique loan originators each quarter to 100 to compare the apartment, hotel and total commercial markets. 

In Q2, there were 50% fewer originators than a year earlier. In multifamily, originations only fell 2% YOY in Q2, while they dropped 20% in retail. Hotels have fared the worst. In 2019, they claimed the most originations—above 200 on the index. In 2020, they’ve plummeted to near 100 on the index—below other property types. 

Commercial properties in total, including office, industrial, and retail, fell an 18% YOY, according to RCA.

Government agencies were the only lender that increased loan volume from Q19 to Q20, rising 4.1%. CMBS had the biggest fall, dropping 59.3. Investor-driven lenders fell 49.5%, while international banks (28.6%) and national banks (16.9%) also had sizable decreases. Insurers (3.5%) and local and regional banks (2.0%) only had modest declines.

Last month Reonomy came to similar conclusions.

Dollar volume for commercial property decreased by 46% year-over-year through July 2020, and deal volume fell 37%, despite the availability of cash equity, according to Reonomy. It also found that hospitality had the most significant decrease in deal volume, though all asset classes saw a considerable decline. Also, lenders’ lack of appetite for commercial assets has impacted price discovery, further deterring transaction volumes. When lenders were making commercial property loans, they tightened underwriting standards for construction deals and all asset classes except for multifamily.

A Better Q4

Some sources take a more optimistic view of the market. In its recent Capital Alert, Marcus & Millichap expects deal activity to accelerate in Q4 as lenders shift priorities to reflect evolving opportunities and risks. Bank and insurance companies will fuel some of that, seeking commercial mortgage loans where they can get yields of 2.5% to 3%. Investment banks are gravitating to fixed-rate construction loans, which could help them lock in low-leverage deals, according to M&M.  Multinational banks, however, are focused on payment relief and covenant kickouts on non-essential retail and hotel properties.