Higher liquidity improved commercial real estate lending in the United States at the end of 2020
Higher liquidity levels, tighter credit spreads and a slight easing of underwriting standards have contributed to a marked improvement in the dynamics of commercial real estate lending in the fourth quarter of 2020, according to the latest research from CBRE.
The CBRE Lending Momentum Index, which keeps pace with commercial loan closings in the United States, reached a value of 221 in December, up 38.2% from September. As of December 2020, however, the index was still down 16% from a year ago.
“Capital markets helped strengthen commercial mortgages at the end of the year as stock prices rose and corporate loan spreads tightened. With lending markets anticipating the effects of additional government stimulus measures on growth and inflation, the fourth quarter of 2020 saw increased participation from alternative lenders and life insurance companies compared to with the third quarter. . Some transactions have remained difficult to underwrite, particularly for retail assets, hotels and transitional assets, ”said Brian Stoffers, Global President of Debt & Structured Finance for Capital Markets at CBRE.
CBRE’s survey of lenders indicates that the composition of the market for commercial real estate loans from non-governmental agencies in the fourth quarter of 2020 resembled the more balanced conditions that existed before the pandemic. There was a high turnout from alternative lenders for bridging loans and life insurance companies for stabilized low-leverage loans in the fourth quarter of 2020. Government agencies also had exceptional production, which provided high levels of liquidity in the multifamily market.
Alternative lenders, which include debt funds, finance companies, and mortgage REITs, captured the highest share (36%) of out-of-branch loan closing volume in the fourth quarter of 2020. Alternative lenders were the main source of bridging loans to the multifamily, retail and office sectors. .
After a weak spring, lending to life insurance companies accelerated at the end of 2020. The market share of life insurance companies increased to almost 30% in the fourth quarter of 2020, reflecting better market participation and the need for lenders to roll out mortgage investment allocations by the end of the year. The fourth quarter 2020 originals were largely low leverage standing loans backed by industrial, office, retail and multi-family properties. Life insurance company LTVs averaged 53% in the fourth quarter of 2020.
Regional banks continued to play an important role in commercial mortgage markets at the end of the year, accounting for 23.7% of originations in the fourth quarter of 2020, down slightly from the levels of the previous year. In addition to permanent loans, banks provided construction finance, mainly for multi-family and industrial projects.
CMBS lenders captured just over 10% of originations in the fourth quarter of 2020. Industry-wide CMBS issuance stood at $ 16.55 billion in the fourth quarter of 2020, bringing the total for the full year to $ 59.25 billion. Due to the disruption in capital markets in the spring, issuance was down 39% from 2019’s $ 97.77 billion.
With the improvement in the availability of capital in the fourth quarter of 2020, lenders granted generally higher loan products and underwriting standards were slightly less restrictive. Average loan-to-value (LTV) ratios increased for permanent commercial and multi-family loans after hitting lows in the third quarter of 2020 not seen since the global financial crisis.