According to recent research from CBRE, commercial lending markets strengthened in Q2 2021, mirroring the wider economic recovery, with borrowers' growing risk appetite fueling increased demand for transitional financing, such as bridge loans.
The CBRE Lending Momentum Index, which tracks the pace of CBRE-originated commercial loan closings in the U.S., remained strong at the mid-year point, reaching a value of 256 -- up 10.8% from the March 2021 reading and now just 1.8% below its February 2020 pre-pandemic close. Compared with a year ago when lending activity fell sharply due to the COVID-19 pandemic, the index is up by 47.3%. Lending activity hit its most recent low in September 2020, when the index value was 160.
"Borrower's growing risk appetite has fueled demand for transitional financing, such as bridge loans. As a result, alternative lenders led Q2 non-agency commercial mortgage origination activity. Regional banks and life companies provided competitive quotes, while CMBS loan origination activity improved," said Brian Stoffers, Global President of Debt & Structured Finance for Capital Markets at CBRE.
CBRE's lender survey indicates activity by alternative lenders, such as debt funds, pension funds and credit companies, surged in Q2 2021, accounting for almost 39% of all loan closings--up from 30.6% in Q1 2021 and 6.5% in Q2 2020. Bridge financing to help borrowers stabilize their properties accounted for more than 80% of alternative lender closings in Q2 2021.
Banks accounted for 24.3% of total loan volume in Q2 2021, dropping from their leading rank in Q1 2021. Regional and community banks were the most active. Construction loans accounted for 46% of bank lending volume in Q2 2021, largely due to increases in industrial and multifamily development.
Life companies accounted for 22.7% of commercial mortgage originations in Q2 2021, up from 19.2% in Q1 2021, and issued competitive quotes on fixed and selective floating-rate multifamily mortgages. Despite some concerns over their mortgage allocations for the second half of the year, life company loans under application have been strong in recent weeks.
In a sign of their more competitive pricing, CMBS lenders originated 14.3% of commercial mortgages in Q2 2021, up from 11% in Q1 2021. Industrywide CMBS issuance totaled $45.7 billion year-to-date through June, up from $30 billion for the same period a year ago. The single-asset, single-borrower (SASB) market has been particularly active, offering efficient financing for larger deals and portfolios.
While underwriting criteria for Q2 2021 was generally consistent with Q1 2021, underwritten cap rates and debt yields inched slightly higher. The percentage of loans carrying full or partial interest-only terms fell for the second consecutive quarter to 54.2% from 60.6% in Q1 2021, reflecting a higher share of amortizing non-agency loans. The average for the past two years is 63%.