Is Commercial Real Estate Lending on the Decline?

Commercial real estate loan volumes reached a record $530 billion across the U.S. in 2017 and have been pretty steady this year, the Mortgage Bankers Association announced in June. The question is whether and how long this will continue – and the answer, of course, depends on whom you ask.

“The commercial mortgage lending market should remain favorable to borrowers for the balance of the year,” CBRE’s Brian Stoffers said recently.

“With the flattening of the yield curve, borrowers with a settled capital structure and long-term horizon may want to take advantage of long-term financing,” said Stoffers, who oversees the global debt and structured finance practice at CBRE. “With the flat curve, borrowers can add significantly to loan terms for little additional expense.”

But other signals indicate that demand for commercial real estate financing has already begun to wane.

While the CBRE Lending Momentum Index, which tracks the pace of U.S. commercial loan closings, found Q2 lending volume relatively unchanged from Q1, it also found that June lending volume was down more than 10% from a year earlier.

And banks reported weaker demand for commercial real estate loans in Q2, even as demand for consumer loans remained stable, the Federal Reserve found in its July survey on bank lending practices.

‘We’re quite content to have less growth’

Two banks reporting difficulty with CRE loan growth include Bank of the Ozarks and Wells Fargo.

Bank of the Ozarks, which over the past few years has been making a mark on the nationwide commercial real estate scene, said when reporting its second-quarter results that its real estate lending growth could slow because there are fewer high-quality deals out there.

“I would say the flow of quality deals has changed,” CEO George Gleason said on Bank of the Ozarks’ Q2 earnings call. “Cost of material [f]or construction are going up, cost of labor for construction are going up, construction period, interest costs are going up. So that makes it more challenging for our sponsors to find and pursue viable projects that are going to meet their returns on their equity investments in the project, in an environment where you’re seeing very little increases in rental rates for sales rights.”

“We’re quite content to have less growth, unless we can get that growth on credit quality and pricing standards that make sense to us,” he added.

Wells Fargo’s Q2 commercial real estate loans declined $2.5 billion from Q1 2018 amid the fallout from its misconduct and what it described as competition from alternative lenders, a decline in underwriting standards and fewer construction opportunities.

Find out more about which commercial real estate lenders are filling the vacuum left by Wells Fargo. Read CrediFi’s NYC Lending Spotlight.

It remains to be seen whether we will see more indications of weakened demand for commercial real estate financing in the rest of 2018.

See the data for yourself with CRE finance analytics.

Related posts:

How Real Estate Lending Trends Are Shifting in NYC – and What That Could Mean for the Rest of the Country

CMBS Delinquency Rate Expected to Stay at Post-Crisis Lows, but Retail Remains a Concern

The Boston Bank That’s Bumping Up Its CRE Lending

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