Increased Commercial Sales Help Drive U.S. Debt Markets in 2018
According to data from CBRE, demand for commercial real estate debt in the U.S. remains strong, supported by an increase in commercial sales transactions in Q3 2018.
Banks, alternative lenders and agencies all contributed to the increase in commercial lending volume. The CBRE Lending Momentum Index, which tracks the pace of commercial loan closings in the U.S, ended Q3 2018 on a strong note at a value of 252--up nearly 25% from 202 in June. Compared with a year ago, the index is up by 13.1%.
"Despite the trend of higher interest rates and lower loan refinancings, commercial real estate debt remains sought after by borrowers and was boosted this quarter by the market increase in sales transactions," said Brian Stoffers, Global President, Debt & Structured Finance, Capital Markets, CBRE.
"Commercial and multifamily loan spreads tightened and then stabilized in Q3, a positive sign for borrowers. This year has been strong for commercial real estate credit, and attractive spreads reflect the strong demand for loan assignments from a variety of lenders," added Mr. Stoffers.
Banks remained active in Q3 2018, accounting for close to 40% of non-agency lending volume. This was up from a 28% share in Q3 2017.
Alternative lenders, including REITS, finance companies and debt funds, accounted for 27% of loan closings in Q3 2018--up from 16.4% in Q2 2018 and 13.1% from a year ago. These lenders have been more aggressively placing loans on construction and bridge assignments, filling a lending gap from traditional lenders.
With additional competition from banks and alternative lenders, life companies dipped to 18.6% of the non-agency lending market in Q3 2018, down from 20.7% in Q2 2018 and 22.9% from a year ago.
After a favorable start to 2018, CMBS issuance slowed by mid-year. As of mid-October, year-to-date issuance totaled $63 billion, down from $68.2 billion for the same period in 2017. At 14.6%, the Q3 2018 share of CMBS conduit originators was on par with Q2 2018, but down from 36% a year ago. Increased lender competition, fewer CMBS financings and lower profit margins have restrained market growth.
The agency multifamily sector remains stellar. Year-to-date through September, combined Fannie Mae and Freddie Mac multifamily loan purchase volume totaled $90.7 billion, just shy of the record-setting pace of $91.6 billion for the same period in 2017.
CBRE's broad loan underwriting measures were slightly more aggressive in Q3 2018. Overall debt service coverage ratios fell slightly, while LTV ratios inched higher. Debt yields and underwritten cap rates fell. In addition, the percentage of loans carrying either partial or full interest-only terms increased to 66.2% from 61.0% in Q2 2018.