By Jim Costello on March 21st, 2019
The U.S. commercial mortgage market got more competitive in 2018, with six out of the eight lender categories tracked by Real Capital Analytics each capturing a 10%-or-greater share of the market. This competition in the lending market comes at a time of turmoil in the broader financial markets that is also pushing up the cost of debt.
Just six months ago, the 10yr US Treasury spiked above 3.2% and fears of inflation were fueling expectations for further increases. As of yesterday, the 10yr UST closed at 2.5% with the Federal Reserve signaling no further increases in the fed funds rate this year.
While the lending market was competitive in 2018, there were gainers and losers for market share. Financial companies (aka debt funds) saw their share of the commercial mortgage market climb to a 10% share, up 300 bps from 2017. This increase in market share came with riskier loans, a topic we will examine next week in our US Capital Trends report.
The whipsaw of interest rate expectations has helped to push up commercial mortgage rates. The rates for fixed 7/10yr mortgages hit a peak of 5.3% in Q4’18, up 110 bps from the lows seen earlier in this cycle. The announcement by the Fed yesterday may help to ease mortgage rates moving forward, but the change in expectations could take time and the difficulties from higher rates are already being felt in the market.
The increase in mortgage rates and general uncertainty can help explain the slowdown in deal volume seen so far in 2019. There was a double-digit drop in deal activity in January and preliminary figures suggest declines in February as well.
On March 27 Real Capital Analytics will publish the lender analysis issue of US Capital Trends. This edition also reports on February pricing and deal activity across the property types.
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