Commercial Lending Markets Maintain Strong Pace

  • Lending activity remained strong in Q4. The CBRE Lending Momentum Index closed at a value of 263 (2005 = 100) in December, just shy of September’s 264. Compared with a year ago, the index was up 4.2%.
  • After loosening in Q3, loan underwriting became slightly more conservative in Q4, marked by higher debt service coverage and lower LTV ratios. The percentage of loans carrying either partial or full interest-only terms fell to 64.1% in Q4 from a high of 67.9% in Q3.
  • Capital markets continued to support strong commercial lending activity in Q4. The Fed lowered short-term interest rates to a target range of 1.5% to 1.75% and adopted a “wait-and-see” approach to future rate policy changes.
  • Treasury yields remained in a relatively narrow range, with the benchmark 10-year yield gradually rising over the quarter in response to investors’ expectations of improving growth.
  • Corporate bond and CMBS pricing remained tight. Between October 2019 and late January 2020, BBB-rated corporate bond spreads tightened by close to 30 basis points (bps). Spreads on benchmark 10-year AAA-rated CMBS bonds narrowed by close to 20 bps over the same period. With tight spreads, the CMBS market is positioned to build on strong Q4 issuance volume, which contributed to a new post-recession high of $97.8 billion in 2019.
  • Alternative lenders, which include debt funds, grew strongly, accounting for 41% of non-agency commercial mortgage closings in Q4, up from 29% a year earlier.
  • The multifamily agency market had a record year in 2019 with volume totaling $148.5 billion. The agencies will have almost $80 billion each to deploy in 2020, which should provide strong liquidity to multifamily investment.