It’s been a challenging two and a half years for the commercial real estate (CRE) industry, but data points are gradually emerging that indicate we may be at or past a trough in market activity, at least for some asset classes. The Mortgage Bankers Association’s (MBA) second quarter release of CRE lending activity showed that commercial loan originations increased slightly compared to last year. Greater lending activity in what has otherwise been a slow market is one reason for cautious optimism.
According to the MBA, commercial lending activity across all lender types increased by 3 percent on an annual basis in the second quarter of 2024. While still a modest increase, it is the first time commercial origination activity increased by more than a percentage point since lending slowed in 2022. In the first quarter of 2024, commercial lending activity across all lender types rose by 0.7 percent -- the first positive annual increase since the second quarter of 2022.
“Though challenges remain, glimmers of good news in the commercial real estate industry, such as greater lending activity, are becoming more plentiful.”
Some Lenders More Active Than Others
Despite this positive trend, not all lenders have returned to market with equal vigor. As shown in the top portion of the following chart, banks and agency lenders, such as Fannie Mae and Freddie Mac, originated fewer commercial loans in the second quarter compared to a year ago. On the other hand, investor lenders and life insurance companies originated more loans than a year ago. The largest increase in origination activity came from the Commercial Mortgage Backed Security (CMBS) market, which increased by approximately 150 percent compared to the second quarter of 2023. It’s worth noting that CMBS originations had largely dried up by the second quarter of 2023, so that large increase is relative to a small number of originations.
While lending is up from a year ago, it remains lower compared with pre-pandemic levels. The comparison to pre-pandemic originations is shown in the bottom portion of the following chart. Here, lending activity for all lender types in the second quarter of 2019 is benchmarked to 100 on the left, and the current level is shown on the right.
With uncertainty in the markets over the last several years, banks, which lend depositors’ money, have stepped back, while investors, which lend their own money, have stepped in. In fact, only investor lenders originated more loans in the second quarter of this year compared to pre-pandemic levels. Meanwhile, bank originations have fallen the most, by approximately 65 percent, compared to pre-pandemic levels. Despite the sizeable annual increase in CMBS originations described above, they were still approximately 20 percent lower compared to five years ago.
Narrowing Price Gaps Reassure Lenders
Lenders are extremely hesitant to extend capital if they can’t be sure of the value of the collateral behind their loan. Given the decline in CRE prices over the last two years, many traditional lenders have pulled back in anticipation of stabilizing prices. As prices have begun to stabilize, and buyers and sellers find themselves agreeing more regularly on what a building is worth, lenders will be more willing to step in and provide credit.
The uptick in lending indicates that sufficient price discovery has occurred in the market for lenders to gain greater confidence in the reliability of asset values. Though challenges remain, glimmers of good news in the commercial real estate industry, such as greater lending activity, are becoming more plentiful.