Commercial Lending Markets: Navigating the Initial Shock of COVID-19

  • The economic fallout from COVID-19 that began in mid-March has caused capital markets volatility not seen since the Global Financial Crisis (GFC). In response, the Federal Reserve reduced the federal funds rate to a range of 0% to 0.25%, provided a new round of quantitative easing measures and opened short-term lending facilities to provide liquidity for the repurchase agreement and commercial paper markets.
  • Commercial mortgage markets are in a period of price discovery, with certain lenders remaining active. Interest rate floors have become commonplace, while underwriting and property-type criteria are more stringent due to tenant credit, property cashflow and valuation concerns.
  • Commercial whole loan spreads for 55%-to-65% LTV loans are some 100 to 140 basis points (bps) wider than Q1 average levels on closed loans. However, conditions have improved in recent weeks. The impact of wider spreads on mortgage rates has been partially offset by the decline in benchmark interest rates.
  • Although loan closings remained active in Q1, the March level of CBRE’s Lending Momentum Index was down 12% from the high point achieved in January—a harbinger of lower loan closings anticipated in Q2.
  • Banks accounted for 32.6% and alternative lenders for 30.3% of loan closings in Q1, leading the non-agency lending groups.
  • Balance sheet lenders such as banks and life companies, along with the agencies, are expected to continue offering loan quotes on a selective basis. However, some alternative lenders have liquidity issues. The underwriting of construction and transitional loans likely will remain challenging over the next few months.
  • New CMBS conduit originations were curtailed in mid-March, as market volatility caused bond spreads to widen significantly. However, the Fed’s resumption of the Term Asset-Backed Lending Facility (TALF), combined with a decline in distressed selling, has since caused spreads to tighten. After reaching a peak of swaps +330 bps in late March, spreads on 10-year AAA CMBS fell to swaps +175 bps by late April. This has generated optimism that shelved deals may soon return to the market, paving the way for new loan originations.
  • Most of CBRE’s broad loan underwriting measures were unchanged in Q1. While underwriting has become more aggressive in recent years, it remains more conservative than in the period leading up to the GFC. Therefore, current originations should withstand higher levels of stress.