By Meghan Hall
During the height of the coronavirus pandemic, the capital markets and lending sectors came to a halt as investors waited out the economic impacts of COVID-19. While a number of challenges remain until full recovery is reached–particularly in office and retail– a recent study released by CBRE indicates that the capital markets environment for commercial real estate is ripening, particularly for asset classes like multifamily.
“In general, as there is a perception of stabilization and recovery, lenders feel more comfortable leaning into [the market],” explained Jesse Weber, with CBRE’s Capital Markets Debt and Structured Finance Group. “All lenders look at things from a retroactive perspective, so for the most part as they’re seeing trends improve in the right direction, it allows for them to be more comfortable…”
According to CBRE’s report, Banksand alternative lenders were active during the first quarter, leading non-agency commercial mortgage origination activity. Banks accounted for 39.2 percent of non-agency commercial mortgage originations. Construction loans accounted for 35 percent of bank originations, most of which went towards construction loans for warehouses and multifamily projects.
Alternative lenders, such as credit companies and debt and pension funds also served as a stable source of bridge capital for transition assets. These lenders made up for 30.6 percent of loan originations during the first quarter. Life companies represented 19.2 percent of commercial mortgage originations, while CMBS lenders made up 11 percent of originations. CBRE notes that CMBS issuance totaled $15.2 billion in the first quarter, down from $22.9 billion during the first quarter of 2020. However, experts expect higher origination volume at the end of the year as acquisition and refinance activity increases.
Credit spreads and mortgage rates remained favorable to borrowers, and the Treasury yield curve stipend during the first quarter of the year and contributed to investors’ growing expectations for 2021 and beyond. CBRE reports that the benchmark 10-year Treasury yields are 66 basis points higher than the end of 2020 and closed at 1.58 percent at the beginning of May.
CBRE also explains that broader financial market trends such as rising equity prices, lower volatility and tight corporate bond spreads are also contributing to a healthier market.
According to CBRE, lenders’ and investors’ focus on multifamily as a main priority in the industry continued. While agency lending slowed slightly during the first quarter and multifamily spreads widened, loan closings for the sector were up 46 percent. Weber stated that as delinquencies and necessary concessions decreased, lenders have been more comfortable re-entering the market. With underlying economics improving, capital waits in the sidelines for appropriate investment opportunities.
“There is more capital available in the debt markets today than I think there ever was at any point in time before,” said Weber. “The markets are extremely healthy and there is, I think ,a lender for all situations…The depths of the capital markets from a debt perspective is as deep as I have seen it in my 15 year career.”
CBRE also highlighted that the multifamily loan-to-value ratio (LTV) decreased by 66 percent, while commercial LTV increased by 59.3 percent. For multifamily investors, borrowers and lenders, this will continue to spur the health of the market.
Looking ahead, CBRE believes that the biggest challenge facing multifamily–and perhaps other asset classes–is understanding how the economy and commercial real estate sector will continue to evolve and recover. While the marketplace is improving, the industry is not entirely out of the woods, although optimism does remain.
“We are very excited about the opportunities that the second half of this year will present,” said Weber.