Macro: Credit Tightening

The steep rise in interest rates during 2022 resulted in unprecedented levels of volatility in the unsecured bond and CMBS markets, resulting in reduced capital availability in those segments which pushed commercial real estate borrowers towards bank term loans. Even seasoned unsecured bond issuers (e.g., REITs like STOR, SRC) turned to the bank term loan market (along with fixed rate swaps) to lock in relatively cheap debt financing. As a result, banks issued a net ~$350B in commercial real estate loans in 2022. For context, that is roughly equal to the cumulative loan growth over the three[1]year period from 2017-2019.

However, reduced commercial real estate transaction volumes combined with tighter bank lending standards, has resulted in negative loan growth for two consecutive months in March and April 2023, per data released by the Federal Reserve earlier this month. Loan growth was either flat or negative across all loan types (residential property, commercial property, farmland, and construction loans).

Takeaways: Financing options for commercial real estate owners have been tough for the past year. CMBS and unsecured bond issuances continue to remain subdued. The contraction in bank loan growth is another metric to watch for as it could result in tougher refinancing options, forced asset sales, and thus provide transactional evidence for declines in real estate values.

This Quick Take was published on May 16, 2023.

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