Fed Policy Shift Calms Commercial Lending Markets

  • The Federal Reserve placed additional rate increases on hold and slowed down the reduction of its balance sheet in response to concern about a cooling U.S. and global macro economy. It now appears that the Fed will not make any additional rate increases in 2019.
  • Despite a very short-lived inversion of the 10-year and three-month Treasury yields in late March, equity and fixed-income markets rallied and the capital market environment for commercial real estate remained favorable.
  • Recent commercial whole loan spread quotes have been relatively stable. Spreads on benchmark 10-year, AAA-rated CMBS bonds gradually tightened over the quarter to an average of swaps+85 bps in early April, down from swaps+105 bps in December and a positive sign for CMBS loan quotes. 
  • Despite fewer loan closings in Q1, commercial lending activity remained robust. The CBRE Lending Momentum Index closed at a value of 239 (2005 = 100) in March, down by 5.4% from December’s close. Compared with a year ago, the index is up 17.9%.
  • Banks remained active in Q1, accounting for 39% of non-agency commercial mortgage closings—up from 25% a year ago and leading the four major lender categories.
  • Agency originations surged in Q1, as Fannie Mae and Freddie Mac purchased a combined $30.3 billion of multifamily mortgages—$6 billion more than in Q1 2018.
  • Underwriting metrics on loans tracked by CBRE Capital Markets in Q1—including overall average debt-service coverage ratios, loan-to-value ratios (LTVs) and cap rates—were largely unchanged from Q4. The percentage of loans carrying either partial- or full-interest-only terms was 67.5%, up slightly from 66% a year ago.