Commercial Real Estate Loan Growth Slows

Commercial Real Estate Loan Growth Slows

Commercial real estate deal volume is getting fueled by lending for the construction of apartments across the country. Pictured are new condos in the Pearl District of San Antonio, Texas. (iStock)
Commercial real estate deal volume is getting fueled by lending for the construction of apartments across the country. Pictured are new condos in the Pearl District of San Antonio, Texas. (iStock)

Multifamily Lending Marks One Bright Spot

Overall growth in commercial real estate loans on the books at U.S. banks slowed again in the second quarter, with multifamily lending marking the only bright spot.

The 1.2% growth in overall commercial real estate lending in the second quarter was the lowest rate for that quarter in the past five years. But apartments and other multifamily properties are a different story as that segment of loans rebounded up from the year-earlier quarter.

Record multifamily sales and a burgeoning demand for affordable rental housing this year have pushed lenders to return to boosting their holdings in apartment deal financing. The capital flow is expected to continue despite Trump administration proposals to limit the exposure of the Federal National Mortgage Association, known as Fannie Mae, and the Federal Home Loan Mortgage Corp., known as Freddie Mac, two of the largest U.S. lenders.

The apartment sector logged record-breaking deal activity in the first half of 2019. The $82.1 billion in executed sales in the first half of the year was up 2% from $80.6 billion in the first half of last year, according to CoStar data. Multifamily sales accounted for 28.4% of all deals in the first half, which fueled apartment lending and propped up the total growth figure for all commercial real estate loans.

Banks boosted the amount of multifamily loan holdings to $445.18 billion at the end of the second quarter, according to numbers released by the Federal Deposit Insurance Corp. That is 2% more than in the first quarter and was the fastest quarterly loan growth in two years.

Lending on multifamily sales, a category that spans apartments, student and senior housing, and mobile homes, has become concentrated among about 10 bank and nonbank lenders, according to a new tally by CoStar. Those lenders on multifamily property sales in the first half of the year closed about 51% of the loan volume on those deals.

The top multifamily lenders, according to CoStar data, were Berkadia Commercial Capital at $3.07 billion, CBRE Capital Markets at $2.58 billion, Walker & Dunlop at $2.04 billion, Federal Home Loan Mortgage Corp at $1.1 billion, Capital One at $1.09 billion, Deutsche Bank AG New York branch at $1.01 billion, Greystone Funding with $949 million, Berkeley Point Capital at $934 million, KeyBank with $887 million, and Wells Fargo Bank at $811 million.

Potential Lending Limits

This past week, the dominance of multifamily lending tied to Fannie Mae and Freddie Mac, known as government-sponsored enterprises, or GSEs, prompted the Trump administration to put forth housing finance proposals designed to limit the federal government’s risk in lending to the sector.

Six of the top 10 largest lenders named on first mortgages on multifamily sales primarily originate deals that are sold to Fannie Mae and Freddie Mac.

More than 80% of mortgage bankers expect GSEs to be the primary lending source for the second half of the year, according to Berkadia’s proprietary survey of its investment sales brokers and mortgage bankers. The same number of respondents also agreed that potential limits on GSEs would have a big impact on the way they do business this year.

“While we’re always keeping an eye on changes that could come from [Capitol Hill], we continue to be impressed with the amount of capital flow that’s gone into the commercial real estate market so far this year,” Ernie Katai, executive vice president and head of production at Berkadia said in releasing the survey results.

Despite regulatory uncertainties, Berkadia indicated confidence in the industry. About 60% of survey respondents anticipate the amount of capital available for deals to remain the same throughout the rest of the year, and 29% expect capital on the table would increase.

“After sustaining four interest rate hikes last year, the industry is continuing full steam ahead and preparing to adjust for regulatory changes as they come,” Katai said.

With single family home prices and construction costs rising, affordable housing has jumped to the forefront of many commercial real estate conversations, Katai said.

“As individuals and families in metros and suburbs across the country continue to struggle with rising rent costs, investors are no longer focused solely on Class A housing,” Katai said. “Many are diversifying their portfolios by adding affordable properties to the mix. We expect tax incentives and other strategies that encourage the growth of this asset class to continue to evolve on a federal, state and local government level.”

Any potential federal legislative or administrative changes to housing finance could be troublesome to multifamily lenders given how dominant the Fannie Mae and Freddie Mac are in financing affordable housing, which is in short supply in the country.

The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, annually caps the amount of loans the two GSEs can acquire from originators, with the 2019 caps limiting each GSE to $35 billion in multifamily acquisitions. However, affordable housing loans are exempt from those caps.

In part because of the exemptions, the caps have not been effective in limiting the GSEs’ multifamily footprint. Fannie Mae and Freddie Mac have grown from owning or guaranteeing 25% of outstanding multifamily debt in early 2008 to approximately 50% of recent multifamily originations, according to the Department of Treasury.

Treasury’s proposal in particular recommends that Congress implement a framework to limit the size of Fannie Mae and Freddie Mac and cap the amount of affordable housing lending.

The goal of that proposal, and another from the Department of Housing and Urban Development, is to limit the amount of federal support the government would have to provide as a backstop to the GSEs in the event of another major financial crisis. In the last recession of 2008, the federal government covered GSE losses of about $190 billion.

Share the Post:

Don't Miss Out on This Year's tax savings!

Our No Cost Review will allow us to calculate your property tax savings