“We are already beginning to see signs of things to come as activity in the real estate credit and equity pipelines increases. There is currently approximately $15 billion in lending in the real estate credit pipeline, up from an average of $10 billion to $12 billion in 2023, with multiple deals being brought to the equity investment committee every week. As both refinancings and acquisitions increase, we expect significant lending opportunities to arise.”
The continuing need for private debt capital
In 2023, US government agencies, insurance companies, and select private debt funds could provide much of the capital the market needs. However, as transaction volumes increase, that may not be possible, as banks are not expected to return to their previous lending activity. Following last year's regional bank failures and declining real estate values, banks' liquidity and commercial real estate portfolios, especially their exposure to offices, have come under intense scrutiny. New York Community Bancorp's decision to significantly cut its dividend in February 2024 was driven by tighter capital standards after it absorbed part of Signature Bank, but this has resurfaced concerns about US banks' exposure to commercial real estate.
Doing some quick math, a 50% to 40% decline in bank lending in the roughly $5.8 trillion commercial real estate debt market leaves a gap of over $500 billion. Who can fill that gap? Insurance companies and U.S. government agencies are unlikely to be able to allocate significantly to commercial real estate given their existing exposures. That leaves CMBS and debt funds.
We expect CMBS issuance to grow significantly over the next few years, rising to $62 billion this year from $47 billion in 2023. We are already seeing signs of a thaw in this market (Exhibit 5A). As for private debt funds, they have $39 billion of accrued capital (Exhibit 5B). These are big numbers, but taken together, current non-bank lending is still insufficient to fill the void created by the withdrawal of banks.
Exhibit 5A: CMBS Issuance ($ billion)