Commercial Property Lending Tumbles As Retail / Hotel Originations Plunge

For those of you out there clinging to your commercial REIT stocks for their ‘defensive’ dividend yields while praying that the whole ‘retail implosion’ thing will simply go away, you may want to avert your eyes now.  According to the Mortgage Bankers Association 4Q 2016 commercial real estate loan originations survey, mortgage originations related to discretionary segments of the economy are in complete free fall with retail and hotel volumes down 19% and 39%, respectively.    

A decrease in originations for hotel, health care, and retail properties led the overall decline in commercial/multifamily lending volumes when compared to the fourth quarter of 2015. The fourth quarter saw a 39 percent year-over-year decrease in the dollar volume of loans for hotel properties, a 24 percent decrease for health care properties, a 19 percent decrease for retail properties, a 4 percent decrease for industrial properties, a one percent decrease in multifamily property loans, and a 6 percent increase in office property loans.

Commercial banks and insurance companies pulled back on new originations while Fannie/Freddie picked up the slack.

Among investor types, the dollar volume of loans originated for commercial bank portfolios decreased by 17 percent year-over-year. There was a 6 percent year-over-year decline for life insurance company loans, a 2 percent decrease in Commercial Mortgage Backed Securities (CMBS) loans, and a 4 percent increase in the dollar volume of Government Sponsored Enterprises (GSEs – Fannie Mae and Freddie Mac) loans.

2016 marked the first YoY 4Q decline since the height of the ‘great recession’.

Meanwhile, via the Wall Street Journal, prescient market observers remind us that markets tend to cycle rather than just rising in perpetuity…shocking news.

Still, the bank recognizes that property values are at record levels after rising for eight years. “I’d say, if I could look back one year ago, we’re probably more cautious [now],” Mr. Myers said.

Some lenders are competing by making riskier loans such as those that finance construction or occupy a “mezzanine” position between first mortgages and equity. In the first quarter of 2017, construction and land loans on bank balance sheets were up 12.8% to $306.1 billion compared with the same period a year earlier, according to loan tracker Trepp LLC.

Lenders and developers have gotten especially aggressive in building rental apartments. More units are under way today than in any period since the mid-1970s, experts said.

“There’s no current looming event that regulators are looking to say we foresee a problem,” said Matthew Anderson, managing director of Trepp. “It’s just the sheer volume and pace of activity and the length of how long it’s gone on.”

But we’re sure this is just another temporary BTFD opportunity.