Commercial Lending: Market Calm After Volatility?

  • Following investors’ growing anxiety over rising interest rates and slower corporate earnings growth, equity market volatility culminated in a late-December price correction and increased corporate bond spreads. Although commercial whole loan spread quotes widened 10-to-20 basis points (bps), the market stabilized along with higher equity prices and improved corporate bond spreads in recent weeks.
  • The Fed has indicated that it will pursue a data-driven approach to setting policy rates in 2019, rather than a predetermined set of rate increases. This appeared to help settle markets in recent weeks.
  • Commercial lending activity was strong in Q4. The CBRE Lending Momentum Index closed at a value of 253 in December, slightly ahead of September’s close. Compared with a year ago, the index is up 13.6%.
  • CMBS issuance totaled $77 billion for the year, down from $87.8 billion in 2017. Lower refinance activity was one factor that accounted for the reduced issuance.
  • Despite some anticipated softness in CMBS conduit lending, many banks and life companies have ample capital to allocate toward commercial mortgages. Recent declines in benchmark rates—the 10-year Treasury rate is down approximately 50 bps from its peak in November—likely will support loan demand in Q1 2019.
  • Overall average LTV ratios were slightly lower in Q4, while debt yields and underwritten cap rates rose. The percentage of loans carrying either partial or full interest-only terms was just over 66%, consistent with the result from Q3 and a year earlier. While underwriting should remain balanced in 2019, the large amount of capital raised by alternative lenders could place upward pressure on loan proceeds and underwriting parameters.