Lenders Make Adjustments After Initial Shock of Pandemic

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U.S. commercial real estate lenders are going through a period of price discovery following the onset of the coronavirus pandemic. Some remain active, but at a higher cost to borrowers depending on property and loan type.

Commercial and multifamily mortgage loan originations decreased 2% in the first quarter compared to the same period last year, according to a quarterly survey from the Mortgage Bankers Association.

Although loan closings remained active in the first quarter, the March level was down 12% from the high point achieved in January, according to CBRE’s first-quarter Lending Momentum Index. That, the real estate services firm noted, is a harbinger there will be fewer loan closings this quarter.

“Commercial real estate finance markets were active during the first quarter — the start of what was expected to be another strong year of borrowing and lending,” Jamie Woodwell, MBA’s vice president of commercial real estate research, said in a statement. “That strong start has been derailed by the coronavirus and our individual and collective responses to it.”

MBA’s survey showed loan originations for hotel, industrial and retail properties led declines in first-quarter lending volumes. Hotel lending decreased by 42%, industrial 39% and retail 37%. However, lending in other sectors increased year over year. Healthcare rose by 16%, multifamily increased 15% and office 8%.

“Early indications are that low interest rates continue to attract some property refinancing, but that overall transaction activity has fallen given the economic uncertainty stemming from the virus,” Woodwell said. “Property investors and lenders have now turned more of their attention to their existing portfolios instead of new business opportunities.”

Banks Increase Share

Among lender types, commercial bank portfolios decreased 1%, according to the MBA.

Importantly, even as activity dipped a bit compared to the first quarter of last year, banks made up about a third of lending. This indicates banks picked up a notably higher share of the total volume in the first quarter as other lenders backed out. Their market share was a significant increase in activity over the second half of last year, when they accounted for about 1 of every 4 loans, according to CBRE data.

The Federal Reserve’s April report on bank lending practices addressed changes in standards and terms.

Banks tightened standards and reported weaker demand across all three major commercial real estate loan categories — construction and land development, nonfarm nonresidential and multifamily — during the first quarter.

In particular, a significant number of banks widened the spreads of interest rates for construction and land development loans, indicating a lower degree of economic health, while only a moderate number widened the spreads for nonfarm nonresidential and multifamily loans.

In addition, a moderate number of banks tightened loan-to-value ratios and increased debt service coverage.

The Fed said banks eased only a couple of terms for nonfarm nonresidential loans ⁠— specifically, increasing the maximum loan size and expanding the market areas served.

A major share of banks reported weaker demand due to decreased customer acquisition or development of properties and a less favorable or more uncertain customer outlook for rental demand.

Mixed Nonbank Results

Other lending sources posted mixed activity in the first quarter with some decreasing their loans and others increasing.

Alternative lenders, which include mortgage real estate investment trusts, finance companies and debt funds, took about a 30.3% share of first-quarter commercial real estate lending volume, according to CBRE data. This was down from more than 40% in the fourth quarter of last year.

The dollar volume of loans originated by life insurance companies decreased 18% year over year, according to the MBA’s survey. While many insurance companies remain active in the commercial mortgage market, they are typically more conservative in financing new deals.

Loans originated by commercial mortgage-backed securities increased 14%; however, that market essentially came to a standstill in March and only recently has begun to return.

Government-sponsored enterprises, including the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., otherwise known as Fannie Mae and Freddie Mac, increased their multifamily lending 6%.

The outlook for lending this quarter is more of the same: mixed, according to CBRE. Banks, life insurers and government-sponsored enterprises are expected to continue offering loans but on a more selective basis.

Other alternative nonbank lenders reported liquidity issues in the first quarter as a result of the pandemic, which could suppress their lending this quarter, CBRE said. In addition, the ability to underwrite value-add and construction deals may be challenging, the firm noted, while opportunistic deals will increase.

The underwriting of construction and transitional loans likely will remain challenging over the next few months, CBRE said.

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