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- Commercial real estate lending nearly halved last quarter as tight financing conditions squeeze the sector.
- Experts have warned of tighter lending conditions and higher interest rates hitting commercial property.
- The sector won't break out of its "logjam" until there's more certainty around market conditions, the MBA said.
Commercial real estate lending nearly halved last quarter, a sign that uncertainty surrounding market conditions is continuing to hammer activity in the sector, according to the Mortgage Bankers Association.
Commercial and multifamily mortgage origination plummeted 49% year-year-year over the third quarter, with new loan origination declining 7% compared to the second quarter of this year, according to data from the MBA.
Mortgage originations declined for all property types and sources of debt capital, the MBA added. In dollar terms, the largest decrease was seen in health care properties, where mortgage originations plunged 76% from 2022. That was followed by declines in hotel, retail, multifamily, and office mortgages, where mortgage originations fell by about half from last year's levels.
The sharp drop is likely due to uncertainty surrounding market conditions, according to MBA head of commercial real estate research Jamie Woodwell.
"Year-to-date CRE mortgage borrowing has fallen 44 percent, driven by questions about some properties' fundamentals, uncertainty about property values, and higher and volatile interest rates," Woodwell said in a statement on Tuesday. "Greater certainty around those conditions is a key prerequisite to breaking the logjam of transaction activity."
Experts have warned of trouble for the commercial real estate sector since early 2023, when a series of regional bank failures sparked fears of tighter lending conditions as banks look to manage their exposure to the struggling sector. The credit crunch in commercial real estate could usher in a wave of distress, with around $1.5 trillion of debt reaching maturity over the next few years.
Surging bond yields have also added pressure to commercial real estate. Even if the 10-year yield eases to around 3.75% in 2024, office prices could plunge by around 40% peak-to-trough, according to an analysis from Capital Economics.