CRE Lending Jumps 72%
A report from the Mortgage Bankers Association highlights the strong rise of originations in the first quarter of 2022 compared to the same time last year.
Better Financing Starts with More Options$1.2M offered by a Bank at 6.0%$2M offered by an Agency at 5.6%$1M offered by a Credit Union at 5.1%Click Here to Get QuotesCommercial Real Estate Lending Volume is Rising
Commercial and multifamily loan origination volumes shot up by 72% in the first quarter compared to the year before, according to a new report from the Mortgage Bankers Association. While this marks a 39% reduction from the fourth quarter, end-of-year lending nearly always outpaces all other quarters.
The strong, sustained demand for multifamily and industrial real estate in particular drove the high volume, according to MBA’s vice president of research, Jamie Woodwell. However, it isn’t just these two golden asset types that drove the huge increase. Lending activity increased in virtually all property sectors.
The hospitality real estate sector saw the highest increase in relative terms, with first-quarter originations rising an incredible 359% compared to the first three months of 2021. A large increase is perhaps unsurprising — hospitality real estate is faring significantly better now than a year ago. Retail lending also jumped by 88% compared to the same time the previous year.
Commercial Mortgage Origination Volume by Loan Type
Depository originations, primarily bank loans, increased 194% year-over-year, the report stated, the fastest of all lender categories. Life company loans jumped by 81% during the same period, followed by investor-driven lenders at a 77% increase.
CMBS loans faced a smaller increase of 56 percent. The securitized loans have experienced some trouble in recent months, particularly with loans encumbering assets in the office and retail sectors of major metropolitan areas. A Moody’s report from March highlighted that nearly 8% of CMBS loans were classified as “troubled,” Bisnow reported.
Interestingly, loans issued through government-sponsored enterprises — think Fannie Mae®® and Freddie Mac®® — held steady, moving up by only a single percentage point.
Commercial Real Estate Origination Forecast
Despite a strong first quarter for commercial real estate originations, the second quarter and beyond could face significant challenges. The largest obstacle is rising interest rates: As borrowing becomes more and more expensive, fewer investors may look for financing. That said, investors will likely not hesitate to borrow to finance acquisitions of industrial and multifamily real estate, given the strength of both real estate sectors.
That said, with the Fed anticipated to increase rates another two times this year alone, less stable asset types, from retail to hospitality, may see a decline in investment activity and lending.
Related Questions
What are the most common types of CRE lending?
The most common types of CRE lending are banks and credit unions. Banks usually have strict eligibility requirements and mostly finance low-risk projects. Banks also require a large down payment, however, also offer some of the lowest interest rates. Credit unions typically have more relaxed eligibility requirements than banks and often offer lower interest rates. However, credit unions usually only finance low-risk projects because they need to generate enough income to cover their operating expenses.
What are the benefits of CRE lending?
The benefits of CRE lending include access to lower interest rates and more relaxed eligibility requirements than banks. Credit unions typically offer lower interest rates and can finance low-risk projects. CMBS loans can provide the highest leverage loan a borrower can get for properties in secondary and tertiary markets, but can also provide a poor loan servicing experience with significant prepayment penalties.
What are the risks associated with CRE lending?
The largest risk associated with CRE lending is rising interest rates. As borrowing becomes more and more expensive, fewer investors may look for financing. This could lead to a decline in investment activity and lending for less stable asset types, such as retail and hospitality. Additionally, credit unions typically only finance low-risk projects because they need to generate enough income to cover their operating expenses.
What are the current trends in CRE lending?
The current trends in CRE lending are that commercial real estate origination volume is rising, with a 72% jump in the second quarter of 2019. However, rising interest rates are a major obstacle, as borrowing becomes more expensive and fewer investors may look for financing. That said, investors are likely to borrow to finance acquisitions of industrial and multifamily real estate, given the strength of both real estate sectors.
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What are the best practices for CRE lenders?
The best practices for CRE lenders depend on the type of lender. For banks, it is important to have strict eligibility requirements and to finance low-risk projects. Banks also require a large down payment, but offer some of the lowest interest rates. For alternative financing options, such as private equity or mezzanine debt, it is important to make sure that financing arrangements are still appropriate for your needs. It is also important to have enough liquidity to cover any potential risks.