How Bank Lending Will Be Affected by Inflation, Rising Interest Rates, and Other Factors in 2022

First Citizens Bank subsidiary CIT’s managing director and group head of real estate finance, Chris Niederpruem, discusses how the situation of the economy is impacting bank lending.

Over the past two and a half years, the bank lending environment, like the rest of the commercial real estate industry, has dealt with a number of factors that have turned it on its head, including the pandemic, global inflation, and various sectors’ performance relative to that of their pre-pandemic numbers. To find out more about the situation of bank lending today, Partner Insights met with Chris Niederpruem, managing director and group head of real estate finance at CIT, a division of First Citizens Bank.
Commercial Observer: Last October, we discussed the situation of bank lending for commercial real estate. What have some of the largest changes been since then in this environment?
Chris Niederpruem: The interest rate environment has altered how commercial real estate investors and lenders see their underwriting, which is the most noticeable change from last fall. Debt plays a significant role in how investors decide on deals. It’s a very different scenario than it was six to twelve months ago because of increased interest rates, the prospect of further rate hikes, and the looming threat of a potential recession. Due to the higher cost of debt, commercial real estate acquisitions frequently have less leverage. How that will affect valuations is the unfinished puzzle piece. We haven’t experienced a rate environment like this in a very long time.
How has this affected the level of competition in this sector of the market?
The environment for competition has undoubtedly altered. There was a lot of unmet demand for commercial real estate lending and investing last year as we were coming out of the worst of the pandemic, and a lot of money had been generated. Therefore, the industry experienced a record year for deal volume last year, and it was very competitive. There has been a decrease in deal volume as a result of the changing interest rate environment and some other changes in the capital markets. Both buyers and sellers are transacting considerably more slowly now. Other lenders and investors now have chance as some lenders have backed off or reduced their enthusiasm for lending. Although it remains a competitive market, it is somewhat more measured than in 2021.
How has the landscape of commercial real estate finance been impacted by the rise in inflation?
The cost of materials and labor has gone up, which has affected construction. Additionally, while estimating a property’s future cash flow, you must take increasing expenses into account and then attempt to balance them with growth in the income or rental side. How much of the markets where rents have historically increased still have growth? For instance, during the past year, rents for multifamily units have increased by double digits in some southeast cities. How much growth is still possible given the impact of inflation on the expense side? Many lenders and investors have been obliged to think more carefully about those issues.

Are there any current national or international developments that, in addition to inflation, have an impact on the financing landscape?

The capital markets have been unstable due to a variety of factors, such as global political unpredictability, rising interest rates, and potential future recessions. These factors have disrupted the capital markets, posing difficulties for lenders who self-finance. Due to this, they are no longer as willing or able to lend as they were in 2019 and 2021. That presents a barrier for certain lenders and an opportunity for others (I’ll skip 2020 for obvious reasons).

Has the demand for specific lending products changed at all during this?

Yes. The most obvious is that investors are increasingly looking for financing options with longer terms and more fixed rates than in the past. In a situation when interest rates are rising so quickly, this shift is common. That’s what we’ve observed, and most lenders, I believe, have noticed an increase in requests for that kind of product.
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