The credit ones are linked to the sales ones. There is a widespread belief that obtaining funding is virtually impossible because many banks are exposed to risk from CRE loans, lending requirements are becoming more stringent, and there are concerns that government-sponsored companies may not reach their lending caps.
But MSCI essentially advised holding on. According to the company, “off-the-cuff statements from industry participants might lead one to believe that the commercial real estate markets are in free fall with no debt available.” The reality, however, is more complicated, with certain industries dealing with illiquidity in the debt portion of the capital stack while others are merely dealing with more expensive debt. Each circumstance has unique effects on future investment performance and activity.
When compared to the pace of the first quarter, loan originations tracked by the company increased by 31% in the second quarter. In the second quarter, variables often raise originations, but from 2013 to 2022, the average rise was only 17%. “If the market were viewed through the prism of a typical second quarter, one might conclude that the slide from a time of excessive liquidity in 2021 and 2022 is complete.”
The numbers weren’t consistent; they were drastically dispersed according to category. $51.2 billion in multifamily originations were made in Q2. From 2015 to 2019, the pre-pandemic five-year average was 4% higher. The highest rise was in industrials, which witnessed originations of $17.2 billion, or 45% more than the average for that property type. The total for retail was $14.2 billion, 15% below the five-year average. $10.7 billion was spent on hotels, which was a 17% decrease from the average from 2015 to 2019. Office saw the highest decline, as might be expected: -52% and $15.1 billion.
Taking a look at both industrials and multifamily, it is obvious that funding is available. However, MSCI noted that using debt no longer offers the same advantages as in the past. “LTVs at origination have decreased for both sectors as lenders take precautions against the risks posed by declining real estate values. Apartment LTVs peaked in 2021 at 64.5%, while industrial LTVs reached a maximum of 59.1%. In Q2 2023, these LTVs decreased to 59.4% and 56.1%, respectively. For these areas, it might be preferable to claim that there is no loan available rather than that there is no cheap debt with lenient conditions like there formerly was.
But it is easy to understand how the sales of the category and the availability of credit for it might move together given the decline in the number of offices.