Despite rising inflation and heightened geopolitical risks, commercial real estate lending activity in the first quarter rose slightly, led by alternative lenders, according to the latest research from CBRE.

The CBRE Lending Momentum Index released this week found lending was up 69% year over year and 5.5% quarter over quarter. It is now 50% above its pre-pandemic close in February 2020. Loan by loan funds and mortgage REITs, in particular, contributed to the increase.

Brian Murphy, CEO of Los Angeles-based Veleta Capital, told GlobeSt.com that he thinks the CBRE momentum index matches what he saw in the first quarter and deep into the second quarter.

“Despite interest rate uncertainty as the Fed works to rein in inflation, we have seen strong demand for multifamily and smaller commercial assets over the past four weeks,” Murphy said.

“We have received over $800 million in new loan applications in the first four weeks since our launch and these applications are heavily weighted to multi-family assets. We are seeing significant competition in the area of ​​loan funds and due to the ever-changing interest rate environment, and it appears that banks are leaning towards capturing more of the bridge loan market given the short duration of the initial loans.

“We expect demand to remain strong, but expect historic rental growth to cool post-pandemic all-time highs. Overall, there are still plenty of opportunities for debt funds and balance sheet lenders like Veleta.

“CBRE’s findings are representative of overall market activity, but in the middle market where many of our clients are concentrated, we have seen substantial bank execution,” said Farhan Kabani, Partner, Four Pillars Capital Markets, at GlobeSt.com. “Transactions under $20 million are a good fit for banks and credit unions, and less so for most life insurance companies.

“Going forward, as we see interest rates rise, I expect we will see another year-over-year increase in the execution of debt funds, but probably within the limits of their size. of historical target transaction. Banks are expected to remain extremely active in the middle market despite rising rates.

Increase ‘It makes sense’

William Young, Vice President, EMEA, NavigatorCRE, stresses that it is logical that lending activity continues to increase, despite greater macroeconomic uncertainty than in recent history.

“Rents continue to rise and we haven’t seen cap rates rise significantly yet, given the amount of capital looking for fewer transactions,” Young told GlobeSt.com.

“Traditional lenders are expected to [such as banks] become more conservative in terms of underwriting and more demanding in the partners they work with and the plans they lend to in Q2 and beyond, decreasing LTVs, increasing rates⁠—what is expected with central bank moves⁠—and work only with partners they know. There will also likely be more control over value-added or speculative projects.

Young added that debt funds will likely continue to back up where banks pull back.

“Since the funds are already raised, the capital must be deployed,” he said. “The question will be how successful these companies are in raising net new capital.”

“We didn’t press the brakes”

Paul LeTourneau Senior Manager, Commercial Loan Originations, Alliant Credit Union, tells GlobeSt.com that his company hhas seen “tremendous” year-to-date growth with volumes up 60% and committed dollars up 98%.

“Alliant did not hold back at all at the start of 2022 despite headwinds from inflation, rising interest rates and lingering geopolitical risks,” LeTourneau said. “There has been an increased desire for floating rates and our pipeline has more floating rate loans than in the past. However, many of the loans closed and increased volumes were loans where sponsors wanted to lock in fixed rates at short term. “

This year’s origination production focused primarily on multi-family, prefab housing communities, student housing, industrial and self-storage assets, he says.

Just like that, the deals failed

But it is clear that a slowdown in lending is in sight. Mark Perkowski, vice president of Draper and Kramer’s commercial finance group, told GlobeSt.com that most commercial real estate loans close 30 to 90 days after the transaction is underwritten and the rate is locked.

“The loans that were closed in the first quarter were all sized at the end of 2021, when we were experiencing low interest rates and relative geopolitical stability, so origination activity was high,” he said. said Perkowski.

“In contrast, we will likely experience a drop in lending activity in the second quarter once the closings catch up to the new interest rate environment and the increase we are seeing in yields and credit spreads.”

Anecdotally, Perkowski said he went on vacation in early March and had three deals for refinancing through insurance company execution. “I came back to the office 10 days later and for all intents and purposes all three loan opportunities were dead.

“The economy of these no longer made sense after benchmark rates rose 37.5 basis points during this period.”

Industry players must ‘do their homework’

Mark Fogel, President and CEO of ACRES Capital, told GlobeSt.com that despite the current global and economic challenges, “Now is the time for industry players to start doing their homework. Now things ain’t so black and white—we have to study, understand and dig deep. Everyone is looking for answers. The uncertainty we face has led many to the safety of the multifamily sector.

Currently, however, he says the opportunity is gone.

“With the amount of capital available to this sector, the ability to enjoy significant returns has gone,” Fogel said.

He said finding opportunities today requires critical thinking to see those prospects from a different perspective.

“Instead of answering this question in terms of asset class or geographic location, I look at whether the project has a smart and experienced sponsor, a well-thought-out business plan and a well-thought-out vision, regardless of asset class. assets or location,” Fogel said.

Multi-family is the “hot” sector

That said, there is no denying the appeal of high-performing categories such as apartments. Rich Marshall, partner at Duane Morris, told GlobeSt.com that he saw a high level of lending activity in the first quarter of 2022, particularly in the multifamily sector.

“Although there has been a slight increase in interest rates over the past two weeks, our lending customers continue to originate new loans and receive requests for proposals on potential loan transactions,” said Marshall. “It appears that this continued trend in activity is due in part to increased stock market volatility, interest rates that remain historically low, and the need for affordable housing given the ultra-competitive and expensive single-family residential market.

“The multi-family is currently the CRE sector in vogue. On some of my recent Class A multifamily transactions on the buyer’s side, cap rates were in the 4 to 5 range. It seems a lot of this multifamily activity is driven by the need for affordable housing in light of the ultra-competitive and expensive single-family residential market.

Banks are the second most active group

CBRE reported that Lenders such as loan funds and mortgage REITs recorded the largest share of non-agency loan closings in the first quarter of 2022, at 42.7%, compared with 30.6% a year earlier.

Banks were the second most active lending group in the first quarter of 2022, with 27.5% of loan closings, down from 39.2% a year ago. Bridge and construction loans accounted for two-thirds of bank financing and permanent loans the other third.

Life insurance companies accounted for 26.3% of non-agency closed loans in the first quarter of 2022, compared to 19.2% a year ago. The majority were fixed-rate permanent loans with an average term to maturity of 108 months, the report said.

Karen Kepler, a partner in Sullivan & Worcester’s Boston office, agreed, telling GlobeSt.com that by expanding beyond traditional options and pursuing innovative and new lending strategies, clients are successfully securing financing for a wide range of CRE opportunities.

Brian Good, CEO of iBorrow, told GlobeSt.com that as a private mortgage REIT, it has seen a substantial increase in demand and start-ups across all product types, including multifamily, office value-added, industrial, mixed-use, retail and stand-alone warehouses. , and destination hotels.

“Due to record industry activity and competition, many borrowers are requiring loans to close in less than three or four weeks. We are on track to double our origination volume this year by compared to 2021, and based on the current trajectory, we expect continued rapid growth in the alternative lending space.