As a wave of distress rolls towards commercial real estate, lenders are pulling back accordingly.
Debt origination volumes in the sector fell 52 percent year-over-year in the second quarter, according a capital markets report from Newmark reported by the Commercial Observer. The advisory firm also found there are 32 percent fewer lenders than a year ago.
Lenders have grown more selective in recent months, demanding lower loan-to-value ratios amid the Federal Reserve’s interest rate hikes. No sector was immune from the narrowed activity.
CMBS and collateralized loan obligations originations fell by 79 percent from last July, while debt fund loan originations are down 73 percent annually. Lending volume among banks, a typical source of loans for the real estate industry, also fell 48 percent year-over-year.
The CMBS market did show some glimmers of hope after an abysmal first quarter that saw the lowest volume of issuances in 15 years. Issuance volumes rose 57 percent from the previous quarter, but were still down 59 percent year-over-year.
As banks and other lenders tread carefully, one place commercial real estate landlords are turning to is the private equity market. The industry has raised $219 billion in dry powder for equity or debt investments. Newmark estimated that more than half of that capital will be aimed towards multifamily assets while a big chunk will also be targeted for industrial assets, sending office and retail assets to the back of the line.
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Borrowers will be jockeying for position to be among those taking advantage of any private equity deployments. There is roughly $1.2 trillion in outstanding commercial real estate debt that is “potentially troubled,” according to Newmark, and more than $626 billion of debt is set to mature in the next three years.
Newmark executive David Bitner is trying to sound an optimistic note about capital markets in the coming year, saying there will be interest rate clarity and a tacit agreement on price points across asset classes between borrowers and lenders forthcoming.
“I’m optimistic that this impasse will break in the next six months,” Bitner told the Observer.
— Holden Walter-Warner