According to a new report by global real estate consultant CBRE, the U.S. commercial real estate lending market remains robust in 2018, despite financial market volatility and heightened trade tensions.
The CBRE Lending Momentum Index, which tracks the pace of U.S. commercial loan closings, kept pace with the previous quarter. Lending volume closed in Q2 2018 at a value of 202, relatively unchanged from 203 in Q1 2018. Compared to a year ago, June lending volume was down by 10.6%.
"The commercial mortgage lending market should remain favorable to borrowers for the balance of the year. Loan credit spreads remain tight and underwriting standards are stable. While there is some risk to an escalation of trade disputes, this has not yet influenced credit availability or pricing," said Brian Stoffers, Global President, Debt & Structured Finance, Capital Markets, CBRE.
"With the flattening of the yield curve, borrowers with a settled capital structure and long-term horizon may want to take advantage of long-term financing. With the flat curve, borrowers can add significantly to loan terms for little additional expense," added Mr. Stoffers.
Banks were very active in Q2 2018, accounting for almost half of the non-agency lending volume closed during the quarter. The shift toward banks was a departure from most of 2017 and early 2018, when a variety of traditional and alternative lenders issued quotes. Banks' construction and value-added lending should benefit from a recent federal law clarifying the types of real estate collateral that require the highest capital reserve standards.
Life companies captured just over 21% of the non-agency market in Q2 2018, down from 24% a year ago. Most life companies have ample commercial mortgage allocations for the second half of 2018, but remain selective on underwriting high-quality properties with strong rent rolls.
Total CMBS issuance for H1 2018 was $40.5 billion, up from $37.9 billion a year ago. CMBS conduit originators have increased their market share over the past several quarters, as tightening spreads have allowed them to issue competitive quotes. CMBS accounted for 14.8% of non-agency loan production in Q2 2018, down from 24.4% in Q1 2018.
The "Other" lender category, which includes REITS, finance companies and debt funds, accounted for 16% of loan closings in Q2 2018, down slightly from 19% in Q1 2018 and 21% a year ago.
Agency multifamily lending is quite active. Year-to-date through May, combined Fannie Mae and Freddie Mac multifamily loan purchase volume totaled $43 billion, not far off the record-setting pace of $44.6 billion for the same period in 2017.
Overall debt service coverage and LTV ratios in Q2 were consistent with the prior quarter. The percentage of loans carrying interest-only terms was 61%, down 5 percentage points from Q1. There has been no substantial deterioration in loan underwriting measures over the past several quarters.