Commercial Lending Markets Search for Balance

  • Compared with Q3, Q4 was characterized by higher levels of liquidity and lending momentum, increased participation by alternative lenders and life companies, tighter credit spreads and a modest loosening of underwriting measures. Nonetheless, certain deals remained challenging to underwrite, especially for retail, hotel and transitional assets.
  • The CBRE Lending Momentum Index increased by 38.2% in Q4 but was down by almost 24% from its pre-pandemic level in February.
  • Q4 origination activity was more balanced, with strong participation from alternative lenders for bridge loans and life companies for stabilized low-leverage loans. The agencies also had stellar Q4 production, which provided high levels of liquidity to the multifamily market.
  • With capital availability improving in Q4, lenders granted generally higher loan proceeds and underwriting measures were slightly less restrictive. Average loan-to-value ratios (LTVs) increased for permanent commercial and multifamily loans after reaching lows in Q3 not seen since the Global Financial Crisis (GFC).
  • Capital markets helped bolster commercial mortgage lending, as equity prices rose and corporate loan spreads tightened. With lending markets anticipating the effects of additional government economic stimulus on growth and inflation, the Treasury yield curve increased for maturities five years and longer. The benchmark 10-year Treasury recently traded at 1.3%, 62 basis points (bps) above its September close.
  • Spreads on seven- to 10-year, 55%-to-65% LTV permanent commercial and multifamily loans tightened in Q4, based on data from CBRE Capital Markets. Commercial spreads tightened by 15 bps quarter-over-quarter to an average of 275 bps, while multifamily spreads tightened by 64 bps to an average of 200 bps.
  • Real Capital Analytics reported $146 billion in distressed and potentially distressed property at year-end 2020. However, distressed sales have been limited thus far, and accounted for just 1% of total transaction value in Q4. This is a promising sign that widespread distressed sales may be avoided, especially if pandemic restrictions ease and economic growth improves in the second half of 2021.