News

After 24 hours of meetings at the Western States CREFC Conference with 20+ lenders ranging from a mid-western private debt fund to the likes of global investment banks such as JPM Investment Management, one major theme rang consistent — CRE lending is doing Risk On!

After nearly two years of defensive retrenching initiated by the Fed’s historically swift increase of the Fed funds rate, the CRE lending sector has become leaner and better capitalized as more capital was raised to take advantage of the risk adjusted returns that floating rate CRE lending is offering today;

Commercial Mortgage Backed Securities (“CMBS”) is having a banner year in terms of originations. Through the first half of the year Lenders have securitized $42.29 Billion (1) of loans surpassing the total securitization volume in 2023.
There are multiple factors that are driving CMBS demand but first allow me to provide some context. CMBS, borne out of the residential mortgage-backed securities market, gained prominence and market foothold in the late 90’s and expanded rapidly to dominate commercial real estate financing by early 2000’s up until the Great Financial Crisis of 2008 and the eventual collapse of Leman Brothers and Bear Stearns.

As we pass the halfway point of 2024 and look ahead to the next six months, there are five capital market trends that we expect to impact CRE activity through year-end.

Sponsor Liquidity

The typical middle market value-add investor and developer are being pulled in many directions and seeing their liquidity dwindle. The causes of this are multifaceted: from capital calls that are being unfunded by LP investors;

By Shlomi Ronen

In the first quarter of the year, we saw a palatable increase in financing requests from a variety of sponsors providing some optimism that real estate activity may be picking up. And while very few could be categorized as “good news” transactions, the vast majority were clearly indicative of what we are seeing in the market.

As we see it,

After a year of historically low transaction volumes, we are finally beginning to see encouraging signs that real estate activity may be picking up.

It’s been helpful that the Fed has given the market guidance on rate cut expectations for this year and the economy seems to be leveling off at a 3% inflation rate which has driven the treasury yield down to around 4%.

In their Sept Mid-year update CBRE reported that year-over-year Q2 investment volume has dropped 60%, a conservative number as I’ve seen other research reports indicating that volume has dropped as much as 75%. With the economy doing well, why is the CRE industry in a state of transaction paralysis?

There are several factors that have brought the CRE industry to this standstill but before I address that I’d like to take a moment to reflect for a moment on the US economy.