Higher Interest Rates, Lower Property Values Keep Lending Tight
The Federal Reserve’s latest lending survey indicates tight lending conditions will remain for a while. (iStock)Commercial and multifamily mortgage loan originations decreased 42% for the first quarter from the fourth quarter, according to the Mortgage Bankers Association.
Decreases in originations showed up in all major property categories and from all major lender sources as higher interest rates and falling property values continue to take a toll on deal activity. The MBA’s outlook for the rest of the year does not see much improvement.
For the past year, originations are down 56% from the first quarter of 2022. There was a 72% year-over-year decrease in the dollar volume of loans for industrial properties, a 69% decrease for healthcare properties, a 67% decrease for office properties, a 55% decrease for multifamily properties, an 8% decrease for hotel properties, and an 8% decrease for retail properties.
Among investor types, the dollar volume of loans originated for life insurance company loans decreased by 73% year over year. There was a 67% decrease for investor-driven lenders, a 59% decrease in commercial mortgage-backed security loans, a 54% decrease for depositories, and a 14% decrease in the dollar volume of Fannie Mae and Freddie Mac loans.
“While the first quarter is typically the quietest quarter of the year, borrowing and lending backed by commercial and multifamily properties declined in the first quarter to the slowest pace since the first quarter of 2014,” Jamie Woodwell, MBA’s head of commercial real estate research, said in a statement. “Uncertainty and volatility in regard to interest rates and property values, and supply and demand imbalances for some property types, has led to a logjam in commercial real estate sales and financing markets.”
Separately this week, banks reported tighter lending standards and weaker demand for all commercial real estate loan categories, according to the Federal Reserve’s quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices.
Banks cited a less favorable or more uncertain economic outlook, reduced tolerance for risk, deterioration in collateral values, and concerns about banks’ funding costs and liquidity positions for the loan tightening, the Fed reported.
Going forward, banks most frequently cited an expected deterioration in the credit quality of their loan portfolios and in customers’ collateral values, a reduction in risk tolerance, and concerns about bank funding costs, bank liquidity position, and deposit outflows as reasons for expecting to tightened lending standards over the rest of 2023, as well.
“As loans mature and adjustable-rate loans reset, we should start to get greater insights into where things stand,” MBA’s Woodwell said.