In this episode of ‘The Inside Look,’ Senior Commercial Real Estate Economist Xander Snyder explains how lenders are beginning to re-enter the market and why that might be the case. 

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Transcript:

CRE Loan Origination up Modestly in the Second Quarter

It’s been a challenging few years for the Commercial Real Estate market, but lending data from the second quarter shows that loan origination activity is picking back up.

• According to the Mortgage Bankers Association, commercial real estate loan originations increased by approximately 3 percent in the second quarter compared to last year.
• Higher lending activity is a sign that, on average, lenders are becoming confident enough to step back into the market.

Does this mean we’re near or at a turning point in terms of credit availability? It certainly does warrant some cautious optimism, but let’s take a look at the data in greater detail.

Cautious Optimism

While 3 percent isn’t a jaw-dropping increase, it is the first increase in lending activity of over a percentage point since credit markets froze in 2022.

Additionally, origination activity did not increase equally across lender types. Banks and agencies originated fewer loans in the second quarter of 2024 as compared to the second quarter of last year. Meanwhile, life insurance companies and investor lenders increased their origination activity

The most obvious increase here, though, is originations of Commercial Mortgage Backed Securities, or CMBS.

• CMBS are typically used to fund purchases of very large properties or portfolio of properties, and they pool together the capital of many different individual investors or banks into a single security.
• Investor lenders, by contrast, typically provide the full amount of the loan being extended, or share it with only a handful of other lenders. CMBS tend to be traded more regularly than investor loans, which are usually privately held throughout the term of the loan.
• For more information on how CMBS work, check out Inside Look Episode 11

The meaningful rise in CMBS loans is encouraging, as it indicates that credit availability for very large transactions has increased compared to a year ago.

That said, compared to pre-pandemic, CMBS origination activity is down still down, by about 20 percent.

• In this chart, you can see origination activity by lender type benchmarked to 100 in the second quarter of 2019 (since CRE lending activity is somewhat seasonal). Only investor lenders, who, again, lend their own money, were more active compared to the second quarter of 2019
• Origination activity for banks, who lend depositors’ money, was down the furthest, by about 65 percent compared to pre-pandemic

So, while the headline story is that CRE lending increased in the second quarter as compared to a year ago, it did not occur evenly or in the same proportion by lender type as compared to pre-pandemic.

Events

I’ll be giving a talk in late November in Birmingham Alabama on the state of the CRE reset and when we should expect more of a turnaround to occur. If you’re interested in attending, please reach out to your local First American representative.