The CBRE Lending Momentum Index declined by 17.6% in Q3, as a sluggish acquisitions market continued to put the brakes on overall lending activity. However, CBRE Capital Markets notes a rise in loan applications in recent weeks—a promising sign for higher year-end closings.
Stabilized multifamily continues to receive strong support from the agencies, while banks and life companies continue to underwrite lower leverage multifamily, industrial and selective office transactions. However, retail and hotel properties, as well as those properties with transitional issues, remain challenging to underwrite. One promising sign has been the re-emergence of quotes from alternative lenders in recent weeks, a source of capital for transitional properties and distressed situations.
Underwriting has become more conservative in the current risk-adverse lending environment. Average loan-to-value ratios (LTVs) for permanent commercial and multifamily loans fell in Q3 to levels not seen since the Global Financial Crisis (GFC).
The Federal Reserve recently announced that it would abandon its implicit 2% core inflation target for future interest rate policy. This supports the view that the yield curve will remain low for an extended period. The Fed’s policy adjustment supported strong liquidity in the capital markets, as corporate BBB spreads continued to tighten in Q3.
Spreads on closed 55%-to-65% LTV permanent commercial and multifamily loans widened in Q3. Commercial spreads widened by 45 basis points (bps) to average 290 bps, while multifamily spreads widened by 25 bps to reach 264 bps. However, recent quotes received by CBRE Capital Markets indicate a slight tightening of spreads in October.
The variation in distress by property type is apparent in CMBS delinquencies. Trepp reports that the overall delinquency rate was 5.48% in September, while hotel and retail delinquency rates were 21.8% and 14.6%, respectively.