Slight Uptick In CRE Loan Closings Signals Possible Stabilization Of Financing Market

Article originally posted on HERE on February 20, 2024

The pace of commercial real estate loan closings inched up toward the end of last year, signaling a possible change in sentiment among banks and other CRE lenders.

The CBRE Lending Momentum Index increased by 1% in the fourth quarter, marking the first quarterly rise since the start of 2022. The index was still down more than 38% compared to a year prior, when lending volume had yet to adjust to rising interest rates.

Indications from The Federal Reserve that borrowing costs have peaked are restoring confidence and paving the way for more transactions, said James Millon, CBRE U.S. president of debt and structured finance. The Fed has yet to pull the trigger on interest rate cuts, citing in January the need for further proof that inflation has been sufficiently quelled.

Still, a decline in credit spreads, less fluctuation between the highest and lowest prices at which properties are being bought and sold, and higher cap rates are beginning to put certain deals into motion, Millon said.

“While the capital markets continue to present challenges, we are seeing more constructive lending conditions for specific asset classes,” he said in a statement.

Banks comprised nearly 40% of the lender pool at the end of last year, followed by alternative sources, such as debt funds and mortgage real estate investment trusts, life insurance companies and commercial-backed mortgage securities.

Floating-rate debt remained popular as a refinancing and acquisition tool, comprising one-third of total loan volume. The average underwritten cap rate rose by 16 basis points to 5.68%, while the average loan-to-value ratio rose to 61.4%, up from 58.3% in Q3.