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Rising Inflation and Interest Rates Has CRE Lenders Pumping the Brakes

After Q2 this year, the Mortgage Bankers Association projected a drop of 18% in commercial and multifamily lending compared to 2021. They were right.

At least, that’s what CBRE says. “The Federal Reserve’s hawkish stance to reduce inflation resulted in higher borrowing costs, more conservative underwriting and lower loan closing volume in Q3,” the organization wrote. “The CBRE Lending Momentum Index fell by 11.1% quarter-over-quarter and 4.7% year-over-year in Q3.”

Some more details: Spreads widened on 55%-to-65%-loan-to-value (LTV) fixed-rate permanent loans running from seven to 10 years in length. “seven-to 10-year,” the analysis said.

Top lenders were, of course, the agencies like Freddie Mac and Fannie Mae at $30.6 billion, down 8.4% from $33.4 billion in Q2.

Next in line were banks for the second consecutive quarter, this time originating 46.5% of the non-agency loans. That’s up from 38.1% in Q2 and double 2021’s Q3. Banks are expected to remain cautious and focused mostly on permanent loans, with some bridge and construction loans.

Alternative lenders provided 32.3% of the non-agency originations, the same as in the second quarter but down 6.7 percentage points from the same quarter last year. “Rising spreads and interest rate cap costs have made some value-added floating rate deals more difficult to execute,” the report said. “CLO issuance slowed to a trickle, with only four deals totaling $3.39 billion in Q3.”

A year ago, life insurance companies were 20.1% of the non-agency loans. That was up to 26.2% in the second quarter, but by Q3, down to 16.7%. CBRE estimates that life companies will become more selective as they come to filling their annual allocations.

CMBS loans took a big drop. In Q3 of 2021, they represented 17.6% of non-agency loans. Now, 4.6%. “Industrywide CMBS origination volume fell to $13.3 billion in Q3 2022 from $20.8 billion in the previous quarter and $29.2 billion in Q1 2022,” CBRE said. “CMBS spreads have widened, making loan quotes less competitive.”

As CRE experts have been telling GlobeSt.com, LTV ratios in loans are down while interest rate caps have soared and debt yields are up. Lenders are clearly telegraphing that they consider current conditions risky. “Despite these changes, the percentage of loans carrying interest-only terms increased to an average of 63.8% in Q3 2022,” CBRE noted, which itself would seem a risky move and a sign that borrowers weren’t able to pencil deals any other way.

The MBA expected this would be a hiccough, with borrowing and lending to rebound in 2023, hitting $454 billion in multifamily and $872 billion overall. Still no 2021, but strong. That was last quarter before the multiple 75-basis point baseline interest rate hikes from the Fed and ongoing inflation.

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By Erik Sherman