In recent months, lenders have tightened their underwriting criteria. However, as many wait out the storm, investor demand has dropped.
During the first quarter of 2023, the Mortgage Bankers Association (MBA) reported a 56% year-over-year decline in its Commercial/Multifamily Mortgage Origination Index and a 42% quarter-over-quarter decline. In the fourth quarter of 2022, the index recorded a 54% decline year-over-year. (The Commercial/Multifamily Mortgage Origination Index is based on an average quarter of 2001 and is benchmarked at 100.)
The volume of loans originated by life insurers decreased by 73% compared to the first quarter of last year, followed by investor-driven lenders (down 67%), commercial mortgage-backed securities (CMBS) shops (down 59%) and depositories (down 54%). According to the MBA, lending volume for government-sponsored agencies (GSAs) fell by 14% year-over-year.
A substantial reduction in commercial/multifamily lending has been observed by life insurers and depositories compared to the fourth quarter of 2022—by 56% and 48%, respectively. On a quarter-over-quarter comparison, investor-driven lenders decreased their origination volume by 42% and GSAs by 40%. However, CMBS shops increased their activity by 99%.
MBA’s Jamie Woodwell noted that the decrease in mortgage originations is attributable to several influential factors on both sides of the lending equation.
Banks have taken caution and tightened their standards because of worries about certain aspects of commercial property, regional banks’ instability, and a more inconclusive economic picture.
Investors have also encouraged less investment activity as interest rates increase and a discrepancy between buyers and sellers remains unresolved, further cutting into demand for acquisition loans. According to data from MSCI Real Assets, investment sales in the first quarter of this year dropped 56% from Q1 2022 to $85 billion.
In addition, sales volumes in office buildings and multifamily saw decreases higher than 60%.
Woodwell noted that current Federal Reserve surveys of senior loan officers indicate difficulty in determining the cause of this decline, with 42.9% of surveyed bank officers stating their commercial and industrial loan standards have tightened to some degree, while 54.0% reported no change. Moreover, weak demand for loans is playing a role, as 65.0% reported decreased demand from large and mid-size firms, and 61.7% noted less demand from smaller businesses.
According to Woodwell, both lenders and investors are experiencing an elevated period of uncertainty when it comes to the health of property fundamentals in certain sectors, the volatility of the debt market, and equity availability. As for long-term mortgages, spreads appear to have stabilized in recent months after widening in the wake of multiple interest rate hikes last year.
In the equity markets, however, there is still a lot of uncertainty about where things are, and people are trying to figure out where cap rates and values are. Ultimately, it’s a Catch-22—people want clarity on where things are to ramp up transactions, yet there’s not much clarity if nothing happens.
Woodwell suggested there is still concern about cash flows in some property sectors, such as offices. “That’s taking a bit of time to be determined,” he remarked. Retail had experienced a similar situation when the coronavirus crisis first began, and eventually, investors grew accustomed to different models. Woodwell commented that there could be potential advantages for firms who invest in these sectors at this time of uncertainty, although lenders tend to wait it out.
Taking a closer look at MBA’s figures, the industrial sector saw the largest decrease in loan origination year-over-year at 72%, followed by healthcare at 69%. Office properties and multifamily households had a 67% and 50% drop in loans, respectively. Contrary to what one might have thought, office and retail saw minor decreases of eight percent. It is possible that the better performance of office properties compared to 2022 helped to narrow their decline. Nevertheless, the hotel sector still managed a modest eight percent decrease despite its massive 359% increase in originations during Q1 of last year.
Woodwell believes that as the year progresses and more commercial real estate loans reach maturity (MBA estimates that $331.2 billion in commercial and multifamily loans will come due in 2023), the market will learn where true values are and get things moving on the transaction front by seeing what lenders are willing to offer during refinancing.
According to Woodwell, about 16% of outstanding commercial/multifamily debt is due to mature this year, and those loans will begin to adjust to current interest rates and values. Eventually, as they mature and new equity or loans are refinanced, it will create a good indicator of where the market is, leading people to regain confidence in buying and selling.
