Commercial Lending Trends – 3Q 2017

  • Commercial and apartment mortgage rates were generally flat between 2Q 2017 and 3Q 2017.
  • YOY commercial and apartment mortgage rates were mixed, with rates flat for commercial and up roughly 30 bps for apartment.
  • CRE and apartment mortgage rates remain near historic lows, despite mortgage rates being either flat or having increases slightly over the last year, likely due to solid CRE fundamentals and interest rates that remain historically low.
  • The apartment sector has led the recovery, but many lenders overindulged on multifamily loans and are concerned about their exposure to the market. Lenders are watching to see if new supply in the apartment sector will lead to rising vacancies and concessions.
  • Commercial LTV ratios in August 2017 were below their post-recession high of 70%.
  • Commercial LTV ratios decreased to 55%, roughly 6 percentage points YOY.
  • Despite decreasing this quarter, apartment LTV ratios were near their post-recession high of 69% in August 2017.
  • Apartment LTV ratios decreased to 67%, roughly 1.5 percentage points YOY.
  • A combination of increased regulation and caution in the market, with some wondering if we are at the height of the real estate cycle, is causing lenders to be more cautious and tighten their credit standards.

MORTGAGE RATES

LOAN-TO-VALUE

 Source: Real Capital Analytics (RCA), 3Q 2017
10-year Treasury data  is based on officially published nominal 10-year Treasury constant maturities

Lenders are becoming more risk-averse, wanting to lower LTVs, raise DSCRs and require strong debt yields, in this uncertain environment. Quality borrowers should have no issues obtaining loans, however, as ample capital is still available to those who qualify.

  • Commercial debt yields were up slightly YOY (20 bps) to 10.4% in August 2017.
  • Apartment debt yields increased 61 bps YOY to 9.3% in August 2017.
  • The commercial DSCR ratio, at 1.67, was flat YOY in August 2017 and has been trending downward since May 2017.
  • The apartment DSCR ratio, at 1.70, was up 5 percentage points YOY in August 2017.
  • Apartment sector debt has been buoyed by Fannie and Freddie, which are able to consistently provide a lot of debt availability.


DEBT YIELDS

DEBT SERVICE COVERAGE RATIO

 Source: RCA, 3Q 2017