Are We There Yet? CRE Lending Shows Signs of Stabilization

Article originally posted on Globe St. on November 14, 2023

A new CBRE analysis noticed signs that the real estate lending market has begun to stabilize. But don’t call for a round at the bar because the current state is not something to celebrate.

“The CBRE Lending Momentum Index, which tracks the pace of CBRE-originated commercial loan closings in the U.S., declined by 3.0% from Q2 2023 and 47.9% when compared with the strong loan volume in last year’s third quarter,” the report said. “The index closed Q3 2023 at a value of 187.”

According to the company, even as transaction volume has fallen, as many sources have noted, borrowing costs appear to have finally peaked. But that doesn’t necessarily mean for every area. CBRE U.S. President of Debt & Structured Finance James Millon said in prepared remarks that “lending conditions may be stabilizing for certain asset classes,” a double qualification.

“Credit is gradually loosening, cap rates are resetting higher and the Fed’s rate hiking campaign may be near the end, which collectively could pave the way for an uptick in deal volume in the second half of next year,” he continued. Although, it’s good to remember that on November 9, Fed Chair Jerome Powell in a speech before the International Monetary Fund offered some sobering remarks.

“The Federal Open Market Committee (FOMC) is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2 percent over time; we are not confident that we have achieved such a stance,” he said. “We know that ongoing progress toward our 2 percent goal is not assured: Inflation has given us a few head fakes. If it becomes appropriate to tighten policy further, we will not hesitate to do so.”

Fed rate hikes may be near the end, but then again, they might not be.

“High short-term borrowing costs continued to constrain alternative lenders such as debt funds and mortgage REITs, which accounted for 27.5% of Q3 2023 loan volume,” CBRE stated.

“Collateralized loan obligations (CLO) slowed to just $6 billion for the first nine months of 2023, down substantially from $27.3 billion over the same period in 2022.”

Banks accounted for 38.4% of the total loan volume. That was down from 43.3% from Q2. Half of the financing was for construction. A third was for refinancing and the rest was for property acquisitions.