Orange County Partnership - News

Commercial Lending Volume Declines Due to COVID; Multifamily and Industrial Sectors are Bright Spots

Several recently released reports on the state of commercial lending indicate a steep drop in 2020 thus far, due in large part to the temporary freeze in deals during the early days of COVID-19. Lending volume has increased of late, despite underwriters being more conservative in their lending decisions.


Commercial brokerage firm CBRE recently released its Lending Momentum Index, which reached a value of 194 in June, a 29.3% decline from the first quarter of this year and 20.5% lower than the second quarter of last year.


CBRE blamed much of the decline on COVID-19, which drastically reduced commercial real estate lending and transactions from mid-March through early April.


Although CBRE noted that broad liquidity was restored to the market later in the second quarter and multifamily agency and certain industrial deals were bright spots, other sectors suffered from what it termed were “selectivity and the withdrawal of Commercial Mortgage Backed Securities (CMBS) and alternative sources of capital.”


“While we have seen a steady improvement in the number of loan applications over the past five weeks, we anticipate that commercial mortgage markets will remain muted over the near-term, especially for retail and hospitality properties, as well as value-added deals, which face the greatest underwriting challenges. Underwriting will likely remain conservative due to current economic conditions and environmental challenges due to the pandemic,” said Brian Stoffers, Global President of Debt & Structured Finance for Capital Markets at CBRE.


Loan credit stress quickly emerged in the retail and hotel sectors, pushing the overall CMBS delinquency rate up to 6.37% in June from 1.24% in March. June delinquencies varied substantially by property type with hotel (22.82%) and retail (17.68%) leading, followed by office (2.43%), industrial (1.21%) and multifamily (0.6%), according to the CBRE report.


CBRE’s lender survey indicates that banks overall captured more than 70% of loan originations in Q2 2020—more than double recent averages—driven by regional bank activity. With overall lending volumes down, banks were a source of refinance capital across all major property types and also funded several bridge and construction loans.


Life companies accounted for the second largest share of loan originations at 23%, down slightly from the second quarter of 2019 level. Most life company originations were conservative, with LTVs of 60% or less.


CMBS conduit lenders struggled to rebuild deal pipelines following the market disruption and the sharp rise in spreads during March and April. In addition, loan underwriting remains challenging. Industry-wide CMBS issuance was close to $30 billion in the first half of 2020, the slowest pace since 2016.


Alternative lenders (includes debt funds, mortgage REITs and finance companies) were largely absent from loan fundings in the second quarter of this year, with several experiencing liquidity issues and unable to close new business.


“The changes in loan underwriting measures reflected the underlying property type composition,” CBRE’s Stoffers said. “While both multifamily and commercial underwriting were more conservative, the overall results were affected by a higher proportion of multifamily loans, which tend to be underwritten slightly more aggressively than commercial ones.”


The Mortgage Bankers Association reported in mid-July that the COVID-19 pandemic had caused a pullback in commercial and multifamily lending thus far in 2020.


The MBA estimates that commercial and multifamily mortgage bankers are expected to close $248 billion of loans backed by income-producing properties in 2020, a 59% decline from 2019's record volume of $601 billion.


Total multifamily lending alone, which includes some loans made by small and mid-sized banks not captured in the overall total, is forecast to fall 42% to $213 billion in 2020 from last year's record total of $364 billion. MBA anticipates a partial rebound in lending volumes in 2021, with activity rising to $390 billion in commercial/multifamily mortgage bankers originations and $308 billion in total multifamily lending.


"The ongoing COVID-19 pandemic continues to disrupt commercial and multifamily real estate markets. Forecasting amidst the social and economic responses to the virus is difficult, but we do expect originations to drop significantly this year before making a sharp, partial rebound in 2021," said Jamie Woodwell, MBA's Vice President for Commercial Real Estate Research. "Net operating incomes (NOI), property values and cap rates across the different property types are expected to experience varying levels of stress in the months ahead, with hotel and retail properties already being the hardest hit."


Woodwell continued, “The multifamily sector has held up quite well so far, with federal government stimulus efforts for the unemployed helping renters make their rent payments. Should such support continue as the economy rebounds, the apartment market will likely remain relatively balanced.”

Link to CBRE report: