DALLAS—The commercial real estate lending market is beginning to stabilize, with borrowing costs appearing to have peaked, even as transaction activity remains subdued, according to the latest research from CBRE.
The CBRE Lending Momentum Index, which tracks the pace of CBRE-originated commercial loan closings in the United States, declined by 3.0 percent from Q2 2023 and 47.9 percent when compared with the strong loan volume in last year’s third quarter. The index closed Q3 2023 at a value of 187.
“While capital markets headwinds continue, we are seeing signs that lending conditions may be stabilizing for certain asset classes,” said James Millon, U.S. president of Debt & Structured Finance for CBRE. “Credit is gradually loosening, cap rates are resetting higher and the Fed’s rate hiking campaign may be near the end, which collectively could pave the way for an uptick in deal volume in the second half of next year.”
Banks accounted for the largest share of CBRE’s non-agency loan closings for the sixth consecutive quarter, originating 38.4 percent of the total in Q3 2023, down from 43.3 percent in the previous quarter. Construction loans comprised about half of Q3 2023 volume, while one-third were for refinancings and the rest supported property acquisitions.
Life insurance companies accounted for 33.5 percent of origination volume in Q3 2023, up from 26.8 percent in the previous quarter, predominantly in fixed-rate acquisition and refinancing loans for multifamily, industrial, and retail assets.
High short-term borrowing costs continued to constrain alternative lenders such as debt funds and mortgage REITs, which accounted for 27.5 percent of Q3 2023 loan volume. Collateralized loan obligations (CLO) slowed to just $6 billion for the first nine months of 2023, down substantially from $27.3 billion over the same period in 2022.
CMBS conduits accounted for less than 1 percent of non-agency loan volume in Q3 2023, compared with 3.7 percent in Q2 2023. Industrywide CMBS origination reached $26.4.year-to-date through Q3 2023, down substantially from $64.4 billion for the same period last year.
Underwriting criteria changed slightly in Q3 2023. The average underwritten cap rate rose by 16 basis points (bps) to 5.68 percent, while the average loan-to-value (LTV) ratio increased to 61.4 percent from 58.3 percent in Q2 2023. Higher interest rates translated to loan constants averaging 6.72 percent in Q3 2023, up 79 bps year-over-year.
Government agency lending on multifamily assets totaled $29.8 billion in Q3 2023, up from $27.8 billion in Q2 2023. CBRE’s Agency Pricing Index, reflecting average fixed agency mortgage rates on 7–10-year permanent loans, rose 23 bps in Q3 2023 and 103 bps year-over-year to 5.64 percent.
