Lending secured by retail properties surged through the first three quarters of 2014—up more than 50% from the same period a year ago, according to the latest research from CBRE.
Origination volume for retail loan closings saw a sizeable increase during Q2 and Q3 2014. Part of the increase reflects stronger refinancing activity, while it is also increasingly apparent that investors are looking for more opportunistic, higher-yielding opportunities in the sector.
Commercial real estate finance markets continued to improve during Q3 2014, with lending activity becoming increasingly broad-based across lenders, property types and strategies. While plentiful liquidity has contributed to these changes, the steady improvement in real estate fundamentals—which have spread well beyond the multifamily sector to the office, industrial, and retail sectors—has contributed to increased risk-taking.
The year-to-date lending volume for the industrial and office sectors was up 31% and 20%, respectively. Multifamily lending also edged higher, although year-to-date volume was level with last year’s figures. While capital continues to be attracted to multifamily housing, growth appears to have leveled off as prime acquisition opportunities have become highly competitive.
Banks improved upon their dominant market share of non-agency commercial lending during the Q3 2014, accounting for 40% of origination activity, up from 34% during Q2 2014. The recovery in the financial health of the banks has supported higher levels of competition and more flexible lending terms.
The CBRE Lending Momentum Index, which tracks the pace of U.S. commercial loan closings, increased 5.2% quarter-over-quarter and 8.9% above its year-earlier level. The index’s rebound was driven by higher levels of property acquisitions and is indicative of a healthy commercial lending market with plentiful liquidity.
“With more borrowers aggressively pursuing value-add deals, there is a clear sign that the risk spectrum has shifted outward in commercial real estate as investors continue to seek yield,” says Brian Stoffers, Global President, Debt & Structured Finance, CBRE Capital Markets. “The conditions that have supported increased liquidity for transactions remain favorable. U.S. Treasuries are falling, while the availability of both public and private real estate mortgage debt is increasing. As a result, borrowing costs for permanent, fixed-rate loans are declining and leading to increased property acquisitions.”
Loan underwriting trends remained fairly stable and average debt service coverage ratios slightly decreased to 1.52x, compared to 1.53x in Q2 2014. Meanwhile, the percentage of loans carrying either partial or full interest-only payments over the loan term increased to 49% from 45% in Q2 2014, though still well below the 57% rated registered in Q1 2014.