Q2 2022 Lender Segment Market Update
The keyword at the end of the second quarter of 2022 is volatility. The U.S. economy is facing headwinds including high inflation (8.6% annualized inflation rate as of the end of May), high oil prices, a continuing war between Russia and Ukraine, and a Federal Reserve that is actively pushing interest rates higher to mitigate inflation. Despite all of this, the United States’ major commercial real estate markets remain healthy, and liquidity in most segments of the finance market remains strong.
The following is our Q2 2022 update:
The insurance company segment of the commercial real estate market is still quite liquid. Most insurance companies have been active during the first half of 2022 and plan to continue lending through the balance of the year. The recent volatility in the corporate bond market has led to historically high spreads. Those high spreads combined with interest rates that have moved up this year are causing borrowing rates to increase. The average10-year fixed-rate loan range for insurance company lenders is 4.50-5.50%.
The bank/credit union sector still has a substantial amount of liquidity and is quite active right now. Most banks have moved away from making fixed-rate loans longer than 7 years and are more focused on short-term loan executions. Construction and bridge bank loans are readily available right now under competitive terms. Banks are also active in the permanent loan market and can get competitive with their loans on lower leverage and higher-quality assets in infill locations.
Freddie Mac and Fannie Mae have continued to lend through all of the current market volatility. Agency debt is still quite competitive for higher leveraged loans in the 65-75% loan-to-value (LTV) range, but other sectors have been able to beat them out in most low leverage transactions unless the property has an affordability component. Agency lenders are still most aggressive when quoting loans on properties that have an affordability component.
High volatility in the financial markets has created a risky environment for securitized lenders to price transactions. This has led to a slowdown in the CMBS market for originations. Most borrowers prefer to take loans from other sources in the current environment. According to a 6-17-2022 article in Commercial Mortgage Alert, “… the forward pipeline for conduit deals is expected to slow sharply in the coming months…”
Debt funds have become an extremely active segment of the commercial real estate finance market over the past several years and can offer borrowers loans and terms that more traditional lenders cannot.