Commercial Real Estate Lending Drop Steepens, Led Lower by Industrial Financing
Mortgage Bankers Association Reports 54% Fewer Originations in Past Quarter
By: Mark Heschmeyer
Most banks reported weaker loan demand for industrial properties. (Steve Proehl/Getty Images)
Higher interest rates sharply reduced commercial real estate lending activity in the final quarter of 2022 as industrial, one of the best-performing property types in the pandemic, posted the steepest drop-off.
The range of decline varies, depending on various reports issued in the past week, but the trends are similar and aren't expected to show much change for at least the first part of this year.
Newly released data from the Mortgage Bankers Association shows 54% fewer originations in the fourth quarter from the third quarter. The CBRE Lending Momentum Index, which tracks a smaller range of deals than the MBA, also noted a lower quarterly decline at 15%.
”Borrowing and lending backed by commercial and multifamily properties slipped further to close out 2022,” Jamie Woodwell, MBA’s head of commercial real estate research, said in a statement. “The last quarter of the year typically sees the highest volumes, but the chill caused by rising interest rates, questions about property valuations, and increased economic uncertainty made the fourth quarter of 2022 the weakest of the year.”
There was a 69% year-over-year decrease in the dollar volume of loans for industrial properties, according to the MBA. As consumers pivoted to online shopping during the pandemic, industrial properties had seen a sharp uptick in rents and investor demand. But higher inflation appears to have put a dent in that sector.
“The overall picture is one of slower borrowing in the face of what have been significant shifts in the market,” Woodwell said.
Office properties posted the next sharpest year-over-year falloff with a 56% decrease in lending, according to the MBA. Multifamily was down 52%, while hotels decreased 46% and retail sank 44%. Fourth-quarter lending activity was roughly half of what it was a year earlier.
Increased Loan Value
The amount of loans held by U.S. banks hit a record high at the end of the year, according to data gathered by BankRegData, but those lenders also set aside more money to cover potential losses amid fears of a downturn in 2023.
Heightened stock market volatility also slowed commercial property lending, according to CBRE.
“The Federal Reserve’s commitment to reduce inflation with aggressive rate hikes continues to heighten market uncertainty, as borrowing costs increase and a lack of price discovery persists,” Rachel Vinson, president of debt and structured finance at CBRE, said in a statement.
Vinson added that “while there is plenty of debt capital available waiting to deploy, fewer borrowers are willing to transact unless they have to.”
Local banks and private capital are stepping in to fill some of slack from big banks, Vinson added, but she expects current conditions to endure well into the second half of 2023.
Banks had the largest share of CBRE’s nonfederal agency loan closings for the third consecutive quarter at 58.3% — up from 46.4% in the third quarter, according to CBRE.
Construction loans accounted for 37% of total bank lending volume, followed by 36% for refinancing and 27% for acquisitions.
Going forward, U.S. banks are expecting demand to weaken further as they tighten lending standards, according to the Federal Reserve’s latest Senior Loan Officer Opinion Survey on Bank Lending Practices, another closely watched industry barometer.
Over the fourth quarter, most banks reported tightening standards, according to the Fed. A similar quantity of banks reported weaker demand for loans secured by nonfarm nonresidential properties and construction and land development loans, and even more banks reported weaker demand for loans secured by multifamily properties.
Regarding lending standards, most banks expected to tighten standards for all types of commercial property loans over 2023, the Fed survey said.
The most frequently cited reasons for tightening standards included an expected deterioration in property values, a reduction in risk tolerance, and a deterioration in credit quality of banks’ loan portfolios.
Banks also reported expecting loan demand to weaken across commercial real estate, according to the Fed. The most frequently cited reasons for weaker loan demand over 2023 included an expected increase in interest rates, and expected lower spending or investments.