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Despite Recent Equity Market Volatility, Commercial Debt Markets Remain Strong
Commercial lending activity was strong in the final quarter of 2018, despite recent equity market volatility, according to the latest research from CBRE. Banks and alternative lenders maintained a strong origination pace in Q4 2018, similar to the previous quarter.
The CBRE Lending Momentum Index, which tracks the pace of commercial loan closings in the U.S, highlighted the continued strength of commercial real estate lending markets in Q4 2018, reaching 253, up 13.6% year-over-year.
CBRE’s Brian Stoffers says, “Despite recent equity market volatility, commercial real estate has weathered the storm well. Many banks and life companies have ample capital to allocate toward commercial mortgages. Alternative lenders have raised record amounts of capital for secondary finance and transitional property lending. The agencies have maintained their loan purchase goals for 2019, which will continue to support liquidity in the apartment sector.”
CBRE reports banks accounted for more than 38% of non-agency lending volume in Q4 2018, up almost 10 percentage points year-over-year. Banks have benefitted from clarification of high volatility commercial real estate (HVCRE) rules and remain active across many market segments.
Alternative lenders, including REITS, finance companies and debt funds, accounted for 25.3% of loan closings in Q4 2018, up from 20% a year ago. Large amounts of private equity capital have been raised to deploy in secondary finance, construction and bridge loans. As a result, CBRE notes origination activity has picked up in recent months.
The performance of life companies improved in Q4 2018, accounting for 22.7% of total volume, compared with 14.5% in Q3 2018. Life companies’ share of the market was down from 30.4% a year ago.
CMBS conduit originators accounted for 13.4% of non-agency loan production in Q4 2018, down slightly from Q3 2018 and down from more than 20% of the market a year ago. CMBS issuance totaled $77 billion for the year, down from $87.8 billion in 2017, with lower refinance activity one factor that accounted for the reduced issuance.
Overall average LTV ratios were slightly lower in Q4 2018, reports CBRE, while debt yields and underwritten cap rates rose.
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