Commercial Lending Levels and Where We Are in the Cycle

Came across this the other day from The Market Commentary blog on Very interesting perspective on lending levels in the CRE world - both retail and multifamily. After all of the talk I have seen on "bubbles" and "excessive leverage" out there, this was somewhat surprising.

Two of the warning signs of a late-cycle real estate market are if rapid growth of mortgage debt leads to high leverage and precarious financial positions of investors in commercial real estate, and if debt-financed transactions fuel unsustainable property price increases. Recent data on commercial mortgage lending from the Fed’s Financial Accounts of the United States show an increase of $168 billion (at an annual rate) in the second quarter, the largest increase in commercial mortgage debt since the first quarter of 2008 (chart below, black line). Taken at face value, debt growth reaching a new high for the cycle warrants careful attention.

However, the real story is how modest lending levels are relative to past cycles:

A broader historical perspective, however, suggests that the recent pickup in lending is still far from an “overheating” pace. Indeed, while growth of mortgage debt in the spring was the fastest to date in this real estate cycle, debt growth was only half the pace prior to the financial crisis, when lending peaked at an annualized $334.1 billion in 2007:Q3.

Furthermore, the diversity of lending sources has continued to expand, which reduces systemic risk as compared to prior peaks:

Commercial mortgage lending over the past two years has been provided by a broadening set of sources. Commercial banks have been the mainstay of lending, providing more than three-quarters of the total increase in commercial mortgages since 2013. In the second quarter, however, the bank share slipped to just over half (blue bars). The CMBS market provided a modest amount of credit in the second quarter, following several quarters where maturities of CMBS issued prior to the financial crisis exceeded issuance of new CMBS (orange bars). It is an encouraging sign for commercial real estate that net CMBS issuance has turned positive, as the market is moving past refinancing the “wall of maturities” issued 10 years earlier.

Life insurance companies have been another growing source of funding in the commercial mortgage market. Net lending by insurers was $42.3 billion (annual rate) in the second quarter (green bars). Total commercial mortgage loans at life insurance companies are up 10 percent over the past year, a growth rate this sector has not seen since the 1980s. Just as too much debt growth can be problematic for the real estate sector if it leads to overheating, too little debt can starve property markets from the financing they need for normal investment and development purposes. The broadening of lending flows to include greater participation from life insurers and CMBS issuance is a sign of a healthy lending market.

Finally, even the red-hot multifamily sector is starting to slow down just a notch:

Lending in the multifamily mortgage market has eased slightly. Multifamily mortgage loans rose at a $93.1 billion annual rate in the second quarter, roughly in line with the pace in the first quarter. For the first half of the year, multifamily lending was running 16.1 percent below the pace over the prior four quarters. Transactions in the apartment market have slowed a bit this year, and lending has followed suit. GSE mortgage pools provided about half the net increase in funding for the multifamily mortgage market in the second quarter, with commercial banks and life insurers accounting for most of the rest of the lending.

While just one data point along the way, it is helpful to reflect on how much better off the industry is as compared to the previous peak in the mid-2000s.

Full Article can be found here:

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