According to CBRE research, the improving U.S. economy created a favorable capital markets environment for commercial real estate lending in Q1 2021, despite continuing challenges in office and retail loan underwriting.
The CBRE Lending Momentum Index, which tracks the pace of CBRE-originated commercial loan closings in the U.S., continued to recover and finished Q1 2021 at a value of 258 (up 16.7% from the December 2020 reading) after rising to a cycle high of 342 in January. With the recovery of commercial mortgage capital markets beginning last summer, the index is now just 6% below its year-ago level. Lending activity hit its most recent low in September 2020, when the index value was 160.
Banks and alternative lenders, such as credit companies and debt and pension funds, were most active in the first quarter, while credit spreads and mortgage rates remained quite favorable to borrowers.
"Many regional banks provided capital across a variety of product types, including permanent, bridge and construction loans. Alternative lenders continue to be a strong source of bridge capital for transitional assets," said Brian Stoffers, Global President of Debt & Structured Finance for Capital Markets at CBRE.
CBRE's lender survey indicates that after trailing life companies and alternative lenders in Q4 2020, banks took the top spot in Q1 2021 with 39.2% of non-agency commercial mortgage originations. Construction loans, mostly for warehouse and multifamily projects, accounted for 35% of bank originations--a promising sign for a return to normal lending market conditions.
Alternative lenders accounted for 30.6% of originations, primarily providing bridge loans across multiple property types, with a particular focus on multifamily.
Life companies accounted for 19.2% of commercial mortgage originations in Q1 2021, primarily permanent loans with an average loan-to-value ratio (LTV) of 54%.
CMBS lenders made 11% of originations in Q1 2021. CMBS issuance totaled $15.2 billion in Q1 2021, down from $22.9 billion in Q1 2020. While the CMBS market is off to a modest start in 2021, higher origination volume is expected in the second half of the year as pandemic restrictions ease and acquisition and refinance activity increases.
While underwriting criteria eased and loan proceeds increased, the percentage of full-term interest-only loans fell from 66.7% to 60.6% in Q1 2021. The amortization rate, which measures the average percentage of original loan balance that pays down over the loan term, increased to 26.8% in Q1 2021 from 18.6% in Q4 2020.