CRE Lending Halves Year-Over-Year in Q3 2023

Published: 11-15-23    Category: General CRE

MyEListings' markets and economics editor and creates content about global macro events and their impact on US commercial real estate.

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In a recent report, the Mortgage Bankers Association (MBA) noted a reduction in CRE lending in the third quarter by about half. This downturn is indicative of a broad-based reduction in the commercial real estate sector, reflecting a more cautious approach from lenders and investors alike.

Multifamily Mortgage Origination Woes

The MBA highlighted that even multifamily mortgage originations have yet to be spared, falling 49% year-over-year in the third quarter. This downturn represents a significant shift in the market, which has seen consistent growth over recent years.

The magnitude of this decline is unparalleled, sending ripples across the multifamily mortgage realm and affecting market participants to significant degrees.

A Cross-Sectoral Slump

An all-encompassing economic slump has impacted most property types and capital sources, indicating a broad-based loss of confidence or a strategic pullback in commercial real estate lending. Office properties exhibit obvious weakness, but multifamily mortgages have been relatively consistent.

Bisnow reports that the lending drop was consistent across various segments, painting a grim picture of the market's current state, and suggestive of broader economic weaknesses. The decline has been sudden and substantial, signaling potentially tough challenges ahead for the sector.

Consequences of the Commercial Lending Decline

The ramifications of such a substantial decrease in commercial real estate lending are far-reaching.

A 50% reduction in lending activity can lead to a slowdown in the development of new projects, limit the availability of funds for property acquisitions, and potentially increase the cost of borrowing.

The knock-on effects could result in a further cooling of real estate market values and an uptick in cap rates, which may deter new investments and stymie growth.

Future Outlook

With eyes on the horizon, it's critical to understand the underlying factors contributing to this sharp decline in commercial lending.

With economic indicators and market sentiments playing a significant role, market participants eagerly await signs of stabilization or a resurgence in lending activity.

The coming months will be telling for the commercial real estate market, as industry participants adapt to the new lending landscape.

The Road to Capitulation

Lending's 50% contraction in the CRE market is reflective of major uncertainty among market participants. This reduction reflects, as well, broader economic uncertainties and a recalibration of risk in the sector.

The current scenario is reminiscent of moments in history when government intervention was perceived as necessary to reanimate the patient, as it were; the bank panic of 1907, the 1929 stock market crash, and 9/11, each of which resulted in significant regulatory additions.

As the massive size of the CRE asset class renders any shift meaningful, the precariously wide bid-ask spreads, particularly on office properties threaten to resolve much lower.

Coupled with greater economic losses to lenders than are likely expected due to transactional reporting opacity, capitulation could lead to an imposed, more tightly regulated solution for the future.

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