Investors Wary of Commercial-Property Risks Hold Back on Loans

Lending for commercial real estate in the US has plunged — and it isn’t just banks that are holding back.

(Bloomberg) — Lending for commercial real estate in the US has plunged — and it isn’t just banks that are holding back. 

Funds affiliated with major investors such as Blackstone Inc., KKR & Co. and Starwood Capital Group also have reduced originations, even as rising interest rates offered the opportunity for fatter returns. 

The dollar volume of new commercial-property loans by investor-driven lenders, such as private equity and debt funds, tumbled 60% in the second quarter from a year earlier, the Mortgage Bankers Association reported Tuesday. Bank originations slid 69%, according to the data, which includes multifamily financing.

While new loans at higher rates are potentially lucrative for investors, concerns are mounting that defaults will increase as property valuations fall and landlords struggle to keep up with payments on floating-rate debt. Lenders can’t easily hike costs without putting more borrowers at risk of distress, so they’ve decided it’s better to wait, said Lisa Pendergast, executive director of the Commercial Real Estate Finance Council.

“Bank and nonbank lenders alike realize that cash is king in today’s environment,” Pendergast said in an email. “So they have to stockpile cash under the assumption that more of their borrowers will suffer distress going forward.”

Read more: Property Loans Are So Unappealing That Banks Want to Dump Them

Commercial-property prices fell 10% in the year through June, MSCI Real Assets reported. The rate of commercial mortgage-backed securities that were delinquent or in workouts with special servicers climbed to 6.44% in July from 6.07% the prior month, according to Kroll Bond Rating Agency.  

Maturing Debt

With building sales at a near standstill, there’s less of a demand for deal financing. But many borrowers still need new loans to replace current debt that’s maturing. The Mortgage Bankers Association estimated that $728 billion in commercial and multifamily debt is coming due this year.

Banks are under increasing pressure from regulators to reduce exposure to commercial real estate, after this year’s collapse of Silicon Valley Bank, Signature Bank and First Republic Bank. All had significant property-lending businesses. 

For nonbank lenders, it’s more about keeping their powder dry until the smoke clears around interest-rate increases and valuations, according to Jamie Woodwell, MBA’s head of commercial real estate research.  

“Our hope and expectation is that the logjam starts to break as there’s greater certainty,” Woodwell said in an interview. 

Private equity and debt funds have been expanding their share of the commercial-mortgage market for more than a decade as banks faced tighter regulations following the 2008 global financial crisis. They often specialize in shorter-term, floating-rate loans with higher interest rates than banks offer.

Sitting on Cash

Debt funds that provide commercial-property financing, including publicly traded mortgage real estate investment trusts, are for now more focused bolstering liquidity and increasing provisions for nonperforming debt. 

Blackstone Mortgage Trust Inc., for example, decreased its loan portfolio in the second quarter to $23.1 billion as it focused on increasing cash and reducing leverage. KKR Real Estate Finance Trust Inc. said it originated no new mortgages in the period. 

Apollo Commercial Real Estate Finance Inc. shrank its $8 billion loan portfolio by about $400 million in the first six months of this year. It’s earning about 5% on its cash without taking the risk of issuing new loans, according to Chief Investment Officer Scott Weiner.

“To the extent the repayments are higher than we expect and we’re sitting on more cash, then we can always look to turn back on the originations,” Weiner said on an Aug. 1 call with investors. “But at this point, it’s not something we’re going to be doing in the near term.”

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