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The U.S. commercial real estate lending market slowed in the first quarter of 2024 due to high interest rates and limited credit availability, but narrowing credit spreads point to signs of stabilization, according to new data from CBRE.
The CBRE Lending Momentum Index, which tracks the pace of commercial loan closings by CBRE in the United States, declined 11% from the fourth quarter of 2023. The index showed a 32.7% decrease compared to strong lending volume in the first quarter of 2023. The index ended the first quarter of 2024 at a value of 168.
The credit spread between the 10-year Treasury yield and 7- to 10-year fixed-rate perpetual commercial loans with loan-to-value ratios of 55% to 65% narrowed 22 basis points (bps) from the previous quarter to 212. The multifamily spread also narrowed 17 bps to 175.
“The commercial real estate lending market slowed in the first quarter, which was primarily driven by market conditions in the third and fourth quarters of 2023. Looking ahead, we are seeing increased activity with a notable increase in BOV (broker valuation value) activity and loans over $100 million, driven particularly by institutional investors looking to recycle capital. CBRE's loan volume in the first quarter of 2024 increased compared to the same period in 2023,” said James Miron, president, U.S. Debt and Structured Finance at CBRE.
“As investment sales have declined, we have seen a shift towards hard maturity refinancings, construction loans and bridge lending, a trend that is expected to continue until interest rate cuts are agreed upon. While commercial banks have reduced their presence in the market, a mix of government agencies, life insurance companies, CMBS and debt funds continues to support credit supply. Credit spreads remain favorable, however rising benchmarks have made securing incremental financing for core assets a challenge.”
Alternative lenders, such as debt funds and mortgage REITs, were the main contributors to CBRE's non-agency loan closings, accounting for 47.2% of the total in Q1 2024. This represents a significant increase from their 20.2% share a year ago, driven primarily by bridge financing. Collateralized loan obligations (CLOs) increased to $1.5 billion in Q1 2024 from $700 million in the previous quarter.
Banks were the second most active lending group, accounting for 22.7% of non-agency loan closings in the first quarter of 2024, down from 41.1% a year ago. Banks are expected to remain cautious due to rising loan extensions, limited liquidity and the possibility of increased regulatory pressures.
Life insurers accounted for 21.3% of offerings in the first quarter of 2024, down from 23.1% in the same period last year. Life insurers remain active but are expected to take a more selective approach this year.
CMBS conduits made up the remaining 8.8% of issuance in the first quarter of 2024, down from 15.7% in the same period last year.
There were some minor changes to underwriting criteria in 1Q24. Average underwritten cap rates and debt yields remained stable at 6% and 9.8%, respectively. The average LTV ratio increased 80 bps to 62.3%. Due to rising interest rates, loan constants averaged 6.92% in 1Q24, down 50 bps from 4Q24.
Agency lending to multifamily assets declined to $19.2 billion in the first quarter of 2024 from $27.1 billion in the fourth quarter of 2023. CBRE's Government Agency Price Index, which reflects average fixed agency mortgage rates for seven- to 10-year permanent loans, fell 32 basis points in the first quarter of 2024 but increased 40 basis points year-over-year to 5.72%.
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