By Jim Costello on September 20th, 2018
The commercial real estate debt markets in the U.S. are now as competitive as ever. Six out of the eight classes of lenders tracked by RCA captured at least a 10% share of the lending market for the first half of 2018. Despite the upward move of the long end of the yield curve over the last year and a half, commercial mortgage rates have not increased as much, in part because of this competition.
However, there are lenders taking on risks to hit higher yield requirements in this competitive environment. Two weeks ago, we noted that financial companies and debt funds were taking on more risks in the form of high-LTV loans. For existing, stabilized properties, we found that 20% of their loans were originated at LTVs of 80% or higher. For all other lender groups, by contrast, this 80%-and-higher range represented only 11% of their originations.
Financial companies and debt funds have been gaining ground for loans tied to some of the riskier equity investment strategies. For loans on value-add properties and especially for construction loans, these lenders have gained market share since 2015.
In a competitive lending market with upward pressure on the long end of the yield curve it can become impossible for lenders to compete on price. Gaining market share by loosening standards and taking on risks that other lenders may not is another avenue to pursue. How long this loosening could continue before becoming destabilizing to the broader market is an open question.
In respect to moves being undertaken by equity investors, there are two classes of investors which have expanded their exposure to commercial real estate in the first half of 2018 by buying more assets than they sold. These two classes are the institutional/fund managers and cross-border investors. REITs, private buyers and users were all net sellers in the first half of 2018.
On September 26 Real Capital Analytics will publish the new issue of US Capital Trends. This edition reports on trends in debt and equity flows for H1’18, as well as transaction activity and pricing in August.