Commercial Lending Eases Off as Underwriting Turns Conservative
- Commercial mortgage markets navigated a difficult period in Q2, as lenders were selective in their deal and property type choices. While broad liquidity was restored to the market and multifamily agency and certain industrial deals were bright spots, other sectors suffered from selectivity and the withdrawal of CMBS and alternative sources of capital.
- We anticipate that commercial mortgage markets will remain muted over the near-term, especially for retail and hospitality properties, as well as value-added deals, which face the greatest underwriting challenges. In addition, underwriting will likely remain conservative due to current economic conditions.
- Commercial mortgage closings fell in Q2, following the onset of COVID-19. CBRE’s Lending Momentum Index closed Q2 down by 29.3% from its Q1 close and down 20.5% from a year ago. However, CBRE Capital Markets notes an increase in loans under application in recent weeks.
- The Federal Reserve’s aggressive policy actions, including lending facilities to support market liquidity and the purchase of approximately $80 billion in Treasury bonds per month, have maintained strong levels of liquidity in corporate and mortgage markets.
- Spreads on closed 55%-to-65% LTV permanent commercial and multifamily loans widened between Q1 and Q2. Commercial spreads widened by 24 basis points (bps) to a 245-bp average, while multifamily spreads widened by 56 bps to a 239-bp average. However, the impact of wider spreads on mortgage rates was offset by a steep decline in benchmark interest rates.
- CMBS conduit originations stalled in Q2, pushing down H1 2020 issuance activity to $30 billion—its lowest level since 2016. However, bond spreads have steadily improved, as the average 10-year AAA CMBS benchmark bridged the swaps +100 bps level in late July, down some 120 bps since March.
- Trepp LLC notes that loan credit stress has quickly emerged in the retail and hotel sectors, pushing the overall CMBS delinquency rate up to 6.37% in June from 1.24% in March. June delinquencies varied substantially by property type with hotel (22.82%) and retail (17.68%) leading, followed by office (2.43%), industrial (1.21%) and multifamily (0.6%).
- Average LTVs for commercial and multifamily loans fell in Q2, as lenders targeted more conservative deals for underwriting and closing.