Commercial Lending: A Second Wind for the Second Half?

  • Despite strong job growth in June, slow wage growth and low inflation have caused the Fed to adopt a more accommodative monetary policy stance. Most market participants anticipate at least one more rate cut this year after the Fed lowered the rate by a quarter-point on July 31.
  • The mixed economic signals and the shift in Fed policy have caused an inversion of the Treasury yield curve. Moreover, longer-term bond yields continued to decline in Q2. In early July, the benchmark 10-year Treasury bond fell below the 2% mark, down by 50 basis points (bps) from March.
  • CBRE’s measure of spreads on closed, fixed-rate commercial and multifamily whole loans in Q2 showed continued tightening for multifamily loans and overall stability for commercial loans. In addition, spreads on benchmark 10-year AAA-rated CMBS bonds have tightened in recent weeks to near the swaps +80 bps level, down by more than 10 bps from mid-June.
  • After a slow start in Q1 following market volatility at year-end, lending activity gained traction in Q2. The CBRE Lending Momentum Index closed at a value of 244 (2005 = 100) in June, up by 2.3% from March’s close. Compared with a year ago, the index is up 20.8%.
  • CBRE’s lender survey indicated that life company lenders had another strong quarter in Q2, accounting for 26% of non-agency commercial mortgage closings—up from 21% a year ago. Banks continued to lead the four major lender categories, accounting for 35% of loan closings.
  • Agency originations continue to keep pace with the market. Through May, Fannie Mae and Freddie Mac combined loan purchase volume totaled $51.8 billion versus $43 billion for the same period a year ago. With the decline in benchmark rates, mortgage rates on seven- to 10- year loans reached their lowest average since Q1 2017.
  • Underwriting on loans tracked by CBRE Capital Markets was slightly more conservative in Q2, with increases in underwritten cap rates and debt yields. The percentage of loans carrying either partial or full interest-only terms fell below the 60% mark for the first time in nearly two years.