Commercial real estate lending surged in the third quarter as buyers and owners jumped on a brief period of lower long-term interest rates.
The increase could be a sign of things to come, according to the Mortgage Bankers Association, as borrowers over the past few years of higher rates took out short-term loans or extended maturing lending for an additional year or two. That has increased the need for additional borrowing as the Federal Reserve has begun lowering its borrowing rate.
The commercial real estate lending market in the third quarter was also marked by a significant increase in acquisition financing across all property types, including large office deals, according to the latest research from brokerage CBRE.
The association tallied the increase in originations at 44% higher than the second quarter and up 59% from the third quarter of last year. Lower interest rates were a key driver of the increase.
Additionally, CoStar data showed that single-asset, single-borrower collateralized mortgage-backed securities deals were the highest of 2024 in the third quarter.
The yield on the 10-year Treasury benchmark dropped during the third quarter from an average of 4.31% in June to 3.72% in September, according to the MBA. Mortgage rates often track the 10-year Treasury bond yield closely. When the yield falls, borrowing costs tend to follow, and vice versa.
Since mid-September, though, 10-year Treasury yields have risen back to 4.31% as of this week.
Need for loans
An increase in long-term rates could slow last quarter’s momentum, according to Jamie Woodwell, MBA’s head of commercial real estate research.
Still, the Fed has begun lowering borrowing costs with two quarter-percentage-point decreases over the past two months. Short-term rates should follow the Fed’s expected lead lower, though the path and endpoint is still uncertain, Woodwell told CoStar News in an email.
"Longer-term rates will be less dependent on Fed actions than on investors’ expectations around inflation, economic growth, budget deficits and more," he said.
Nonetheless, the need for loans in the coming quarters is also increasing, Woodwell said.
"Upcoming loan maturities have been boosted by recent loan extensions — some built into the original loan and some agreed to by lenders and borrowers who saw such actions as beneficial to the long-term health of the deal," he said. "Add to that a higher than usual share of shorter-term, three- to five-year loans borrowers have sought since the onset of the pandemic and you have the potential for significant borrowing in coming years."
Healthcare leads charge
Loan originations for healthcare properties increased 191% in the third quarter compared to the second quarter, according to the association. There was a 56% uptick in originations for retail properties; a 53% boost for multifamily properties; a 42% gain for office properties; and a 21% rise for industrial properties. The dollar volume of loans for hotel properties decreased 25%.
There were slight changes to underwriting criteria in the third quarter, with average capitalization rates and debt yields increasing by 0.2% quarter over quarter to 6%, CBRE data shows. The average loan-to-value ratio increased from 61.6% to 62.8%.
“We saw a notable uptick in acquisition financing compared to both the prior quarter and the same period of last year,” James Millon, U.S. president of debt and structured finance for CBRE, said in a statement.
A notable area of lending strength was the single-asset, single-borrower commercial mortgage-backed securities market, according to CBRE.
“Notably, large office transactions in New York City underscored the return of debt liquidity for high-quality office assets backed by major institutional sponsors at conservative leverage,” Millon said.
The third quarter saw the issuance of $20.2 billion in single-asset, single-borrower CMBS deals, according to CoStar data. A $650 million loan on 277 Park Ave. and a $400 million loan on 731 Lexington Ave. — both in New York — were among the largest third-quarter deals.
In comparing lender types, the dollar volume of loans between the second and third quarters for banks increased 86%, according to the MBA. Multifamily loans from Freddie Mac and Fannie Mae rose 55%; life insurance originations climbed 40%; loans from nonbank investor-driven lenders went up 21%; and CMBS loans grew 12%.
Debt funds notably saw a 70% surge in origination volume year-over-year among alternative lenders, according to CBRE.