DALLAS, TX – Higher liquidity levels, tighter credit spreads, and a slight relaxation in underwriting standards have contributed to a marked improvement in commercial real estate lending dynamics in Q4 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.
“Financial markets helped bolster commercial mortgages at the end of the year as stock prices rose and corporate loan spreads narrowed. With loan markets anticipating the effects of further economic stimulus from the government on growth and inflation, the fourth quarter of 2020 saw increased participation by alternative lenders and life insurance companies compared to the third quarter. Some transactions remained difficult to underwrite, particularly for retail, hotel and transition assets, ”said Brian Stoffers, global president of debt and structured finance for capital markets at CBRE.
CBRE’s lender survey indicates that the makeup of the non-governmental agency commercial real estate lending market in Q4 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-debt loans in Q4 2020. Government agencies also had stellar output, which provided high levels. of liquidity in the multifamily market.
Alternative lenders, which include loan funds, finance companies and mortgage REITS, captured the highest share (36%) of non-agency loan closing volume in Q4 2020. Alternative lenders were the main source of bridging loans for the multi-family, retail and office sectors.
After a weak spring, lending to life insurance companies gained momentum at the end of 2020. The market share of life insurance companies increased to nearly 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 Q4 2020 initiations were largely low leverage standing loans backed by industrial, office, retail and multi-family properties. Life insurance companies’ 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 initiations in Q4 2020, down slightly from the levels of the previous year. In addition to permanent loans, banks provided construction finance, primarily for multi-family and industrial projects.
CMBS lenders captured just over 10% of creations in Q4 2020. Industry-wide CMBS issuance was $ 16.55 billion in Q4 2020, bringing the year total. to $ 59.25 billion. Due to the financial market disruption in the spring, issuance was down 39% from 2019’s $ 97.77 billion.
With the availability of capital improving in the fourth quarter of 2020, lenders have extended generally higher loans and underwriting standards have been slightly less restrictive. Average loan-to-value (LTV) ratios increased for both permanent and multi-family commercial loans after reaching low levels in Q3 2020 not seen since the global financial crisis.