RCA Insights

The US Debt Stool, Though Wobbly, Is Still Standing

By on September 16th, 2020

The debt portion of the U.S. capital stack has seen a tumultuous 2020. Key industry participants have pulled back on mortgage originations in response to the uncertainty around the Covid-19 recession. Commercial mortgage originations in the second quarter of 2020 were supported by banks and the GSEs.

The debt portion of the capital stack is more stable today than it was in the last downturn. The Global Financial Crisis was, as the name suggests, a financial shock and the majority of the legs of the debt stool were kicked out. Take away the debt portion of the capital stack and you are going to have a bad time with respect to asset pricing.

Into Q2 2020, the pullback by CMBS and investor-driven originators is not as destructive to asset pricing today as the shocks to the debt market were in the GFC. There is still debt available to commercial property investors in this downturn. Bank lenders in particular are still in the game and, with the pace of acquisitions falling, refinancing activity dominates originations. The GSEs were the largest source of debt capital in Q2 2020, behind 30% of all lending according to preliminary data.

comparison of US CRE lenders since 2018

Investor-driven lenders had been the most aggressive originators in the recent economic expansion. These lenders have not pulled back as sharply as the CMBS originators, but their shrinking market share reduces the availability of the high octane debt that these groups put out in the marketplace.

A reduction in debt availability led to a vicious downward spiral in the GFC, with falling prices making lenders hesitant to originate new mortgages. That lack of debt forced owners of even cash-flowing properties to sell at a lower prices, which in turn made lenders more fearful of falling prices.

The fact that the current market still has a number of legs on the debt stool has provided support to asset pricing, with the RCA All-Property Index CPPI down only 1.5% year-over-year in July. Declines are likely to be coming in the months ahead, but the debt markets so far do not seem to be an accelerant to that decline.


US Capital Trends will be released September 23. In this edition we report on lending activity in the first half of 2020 and rank the top originators across the property types. We analyze distress flows in the market and summarize volume and pricing data for August.

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Also on RCA Insights:

Little Evidence of US Distress Sales, Except Hotels

Liquidity Drops in 111 Commercial Property Markets Globally

CMBS Distress Is Only the Tip of the Iceberg

Jim Costello

Jim Costello

Senior Vice President

Jim Costello has worked in the CRE space on issues of urban economics since 1990, including a 20-year stint at Torto Wheaton Research. Jim expanded the reach of the Torto Wheaton Research team developing forecasts of global market fundamentals. He also developed approaches to pair the forecast results with frameworks to answer investor questions on asset values and relative investment opportunities.

In the aftermath of the Global Financial Crisis, Jim provided advice to the Treasury Department and helped educate these professionals on commercial real estate performance. Jim is a member of the Commercial Board of Governors of the Mortgage Bankers Administration, where he helps policy makers understand the commercial real estate industry.

Jim is expanding the capabilities of the Real Capital Analytics team on issues of real estate market dynamics. Jim has a master’s degree in economics and is a member of the Counselors of Real Estate.