Commercial real estate mortgage markets navigated a difficult period in the second quarter of 2020 following the onset of COVID-19, according research from CBRE.
A temporary freeze in commercial real estate lending and transaction markets beginning in mid-March through early April, resulted in fewer loan closings in Q2. CBRE’s Lending Momentum Index, which tracks the pace of commercial loan closings in the U.S., reached a value of 194 in June – a 29.3 percent decrease from the first quarter and down 20.5 percent from a year ago.
While broad liquidity was restored to the market later in the quarter and multifamily agency and certain industrial deals were bright spots, other sectors suffered from selectivity and the withdrawal of CMBS and alternative sources of capital.
“While we have seen a steady improvement in the number of loan applications over the past five weeks, we anticipate that commercial mortgage markets will remain muted over the near-term, especially for retail and hospitality properties, as well as value-added deals, which face the greatest underwriting challenges,” said Brian Stoffers, global president of debt and structured finance for capital markets at CBRE. “Underwriting will likely remain conservative due to current economic conditions and environmental challenges due to the pandemic.”
Loan credit stress quickly emerged in the retail and hotel sectors, pushing the overall CMBS delinquency rate up to 6.37 percent in June from 1.24 percent in March. June delinquencies varied substantially by property type with hotel (22.82 percent) and retail (17.68 percent) leading, followed by office (2.43 percent), industrial (1.21 percent) and multifamily (0.6 percent).
CBRE’s lender survey indicates that banks overall captured over 70 percent of loan originations in Q2 2020 – more than double recent averages – driven by regional bank activity. With overall lending volumes down, banks were a source of refinance capital across all major property types and also funded several bridge and construction loans.
Alternative lenders (includes debt funds, mortgage REITs and finance companies) were largely absent from loan fundings in Q2, with several experiencing liquidity issues and unable to close new business.
