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Competition Pushes Lenders Towards Riskier Investments
Competition across the U.S. commercial real estate debt markets is keeping commercial mortgage rates from increasing much, despite the upward move of the long end of the yield curve over the last year and a half. Research by Real Capital Analytics (RCA) shows that six out of the eight classes of lenders captured at least a 10% share of the lending market for the first half of 2018.
RCA’s Jim Costello notes, lenders are taking on risks to hit higher yield requirements in this competitive environment. The CRE economist writes, “financial companies and debt funds have been gaining ground for loans tied to some of the riskier equity investment strategies. For loans on value-add properties and especially for construction loans, these lenders have gained market share since 2015.”
Costello points out, “in a competitive lending market with upward pressure on the long end of the yield curve it can become impossible for lenders to compete on price. Gaining market share by loosening standards and taking on risks that other lenders may not is another avenue to pursue. How long this loosening could continue before becoming destabilizing to the broader market is an open question.”
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