Commercial lending: keeping a good thing going

  • Although lower loan maturity volumes have resulted in less originations this year, the commercial mortgage market remains in good shape overall. Loan credit spreads remain tight and underwriting standards are stable. 
  • With an additional short-term policy rate increase by the Federal Reserve in June, the yield curve has continued to flatten. As of mid-July, the spread between 10-year and two-year Treasury bonds was only 25 bps—the tightest level since before the 2008 recession, when the yield curve inverted.
  • Q2 lending volume, as measured by the CBRE Lending Momentum Index, was even with Q1 levels. Compared to a year ago, however, the index is down 10.6%. 
  • Total CMBS issuance for H1 2018 was $40.5 billion, up from $37.9 billion a year ago. The favorable issuance activity is supported by pricing. Spreads on new-issue, 10-year, AAA-rated paper have been trading in the swaps+ 75-to-85-bps range since April after reaching lows in early February. Many industry analysts appear upbeat about the second half of the year, and expect spreads to remain close to current levels. 
  • Agency multifamily lending is quite active. Year-to-date through May, combined Fannie Mae and Freddie Mac multifamily loan purchase volume totaled $43 billion, not far off the record-setting pace of $44.6 billion for the same period in 2017. 
  • Overall debt service coverage and LTV ratios in Q2 were consistent with the prior quarter. The percentage of loans carrying interest-only terms was 61%, down 5 percentage points from Q1. There has been no substantial deterioration in loan underwriting measures over the past several quarters.
  • Despite financial market volatility and heightened trade tensions, the commercial mortgage lending market should remain favorable to borrowers for the balance of the year. With the flattening of the yield curve, borrowers with a settled capital structure and long-term horizon may want to take advantage of long-term financing. With the flat curve, borrowers can add significantly to loan terms for little additional expense.