• Tue. Jun 21st, 2022

As banks retreat from commercial real estate lending amid concerns about the pandemic’s impact on retail and office occupancy rates, alternative lenders have become the primary source of new lending.

In the third quarter, private debt funds and other alternative lenders accounted for 39.1% of all CRE issuance, up from 34.9% a year earlier, according to new data from CBRE Group. Conduits for commercial mortgage-backed securities also saw strong growth. Banks held 23.1% market share, against 38.3% a year earlier.

“Loan funds really started to kick into high gear in the second half of 2020, amid the pandemic, when banks were largely on the sidelines,” said Brian Stoffers, global president of debt and securities. structured finance at CBRE.

For years, non-bank lenders have used aggressive underwriting tactics to seek high yields in commercial real estate loans, and they have been gaining ground against banks. When the COVID-19 pandemic emptied office buildings and shuttered retail stores across the United States, the trend accelerated.

Banks themselves are often the funding source for these debt funds, Stoffers noted. He said while banks can charge for commercial real estate loans, they can do so through alternative lending channels, which would preserve the new equilibrium in the market.

Overall, commercial real estate lending is showing signs of strength – despite some uncertainty over whether recent trends, such as the need for less office space as work-from-home arrangements persist, will prove permanent .

CBRE’s index for CRE lending activity in the third quarter rose 31.6% from June and more than doubled from a year ago. The index is also 29.1% higher than its February 2020 level, just before the COVID-19 pandemic.

Banking industry leaders are eagerly awaiting a broad rebound in loan growth next year, but increased competition from non-bank lenders could make it harder to achieve such a surge in commercial real estate lending.

“Commercial real estate is becoming more and more competitive,” Terrance Dolan, chief financial officer of the $567 billion U.S. Bancorp in Minneapolis, said in a recent interview.

Still, Stoffers said, “Banks will enter 2022 with new allocations and target volumes to hit.”

Two segments of the commercial real estate market are booming: loans for multi-family and industrial buildings. The volume of industrial property-backed loans in non-bank portfolios more than doubled between December 2019 and June 2021, according to an Oct. 19 report from Moody’s Investors Service.

But in other parts of the CRE market, including the office and retail sectors, “many banks spoke of continued reluctance to significantly increase” balances next year, analysts wrote. from Fitch Ratings in a November 5 report.

Loans backed by office space were the only part of the commercial real estate market in which new creations declined between December 2019 and June 2021, according to Moody’s.

“The popularity of remote work arrangements has grown, and with it questions about the post-pandemic role of offices, making it likely that this type of property will see an increase in vacancies over the next couple of years,” they said. wrote Moody’s analysts in the report.

Moody’s expects office lending performance to be “fairly flat” over the next 12 to 18 months, in part because many tenants have entered long leases. To hedge against a more severe downturn, debt lenders, who often have large exposures to the office sector, have typically accumulated additional reserves.

An alternative lender, real estate investment trust Apollo Commercial Real Estate Finance, “reinforced confidence that there is sufficient liquidity in the market to support the underlying assets as they continue to face the induced headwinds by the pandemic,” according to a Thursday report from analysts at BTIG, which recently hosted a fireside chat with the company.

There are niche segments of the commercial real estate industry that are well positioned to drive growth in new builds next year, Stoffers said. Bridge loans, which are typically for relatively short terms of three to five years, have become increasingly popular, and even certain sections of the office market may be a source of new growth, he said.

“Generally, well-leased office loans are in high demand right now,” Stoffers said. “Less for suburban office loans.”