MSCI lately has been exploring commercial real estate debt in some ways different from up-and-down judgments like there is not debt available or the debt market is going to explode. The firm’s overall capital trends analysis for August 2023 looked more deeply at the current complexity of debt financing and the state of CRE debt, including borrowing costs, capital flows, pool of lenders, and seller financing.
Another topic they examined is lender composition during the first half of 2023. Understanding lender composition is important in CRE strategic planning because it helps you identify both sources that have a greater likelihood of interest in a given property type and also alternative sources you might not have previously considered.
“The turmoil in the banking sector early in 2023 has made the market for commercial property lending more dependent on the stable financing from the GSEs,” MSCI wrote. “These lenders were behind 26% of all originations for H1 2023, a jump from the 19% share in 2022. This increase was not a story of the importance of the apartment sector to the overall market. In the apartment sector itself, the GSEs climbed to a 58% share of the market, up from 38% in 2022.”
Banking stressors, like a previously unheard of 4.8% year-over-year drop in deposits, first half of 2023 versus the same period in 2022, are having an impact. And still, as MSCI noted, regional and local banks that were 28% of originations in the first half of 2022 were 29% the same period of 2023.
MSCI did say that the half-year measure was too broad to understand the impact of bank shutdowns. “For just the second quarter of 2023, the regional/local banks fell to a 25% share of the market versus a 34% share in the first quarter,” they wrote. “This decrease of 900 bps is the sharpest decline in market share by smaller bank lenders since we started tracking this information in 2011.”
Something they didn’t mention is that it might take more time and data to understand what happened. Transactions were down, meaning originations were as well. Would a more normal flow of business show a different distribution? Were there other conflating factors that could suggest different interpretations?
Some other data points showed some interesting short-term trends. Between 2019 and 2023, average CBMS loan sizes have grown from about $15 million to nearly $20 million. But loan-to-value ratios fell from 65% to 55%. National banks went from about $13 million to a low of $10 million in 2021 and then back up to about $13 million by 2023, while LTV dropped from just under 65% to about 63%. Insurance loan sizes averaged about $19 million in 2019, dropped across 2020 and 2021, jumped to nearly $25 million in 2022, and then back to the $19 million in 2023. But LTVs fell from about 62% to maybe 58% this year.
In the 2015 to 2019 average, CMBS were about 17% of all CRE loans; now they’re half of that. Investor driven loans are now 10%, larger than that previous five-year period. Government agency loans had been 23% and are now 26%. Insurance lending was almost unchanged, slipping from 11% to 10%. National banks are down from 16% to the current 10%. But local and regional banks, once 17%, are now 29%, showing their growing importance.