Commercial real estate lending volumes continue to thrive, bouncing back from its winter slump in the second quarter. Commercial real estate lending volume surpassed its 2015 levels. The area has been one of several asset classes which were severely affected by the global economic crisis, having witnessed property values decline by more than 25 percent in various markets. Experts even had predicted there would be a drop of 50 percent for worst affected regions. According to CBRE, United States loan origination volumes grew 5.7 percent year-over-year. CMBS lending volume is down from last year.
Banks had increased their United States commercial real estate lending share to 49 percent, compared to 10 percent for CMBS shops, highlighted CBRE. Most banks are deleveraging, with many including CRE lending. According to McKinsey & Company, bank financing for CRE has dried up significantly as a result. McKinsey released its Commercial Real Estate Finance Survey, one of two McKinsey surveys which focuses exclusively on commercial real estate. The survey highlighted estimated EU banking groups which comprised about 40 percent of the CRE loans outstanding on balance. The survey spanned 2006 and 2007, the final two years of the property boom, providing a clear picture of how the industry performs in good years.
The survey results revealed two key findings: First, the industry as a whole does not return its cost of capital (defined as equity) even in the best of times, let alone over the business cycle. Second, other factors include a lack of revenue diversification and cost inefficiency. McKinsey forecasts that even after the current crisis has faded, the CRE finance industry will continue to destroy value. The availability of capital has significantly constrained the balance sheets of CRE lenders. In Western Europe, net interest margins have gone up 100 percent or more.
According to McKinsey & Company, in the recent boom, CRE lenders did not see the need to invest in large workout organizations. “Now, given the unprecedented scale and pace of deterioration in many markets, banks urgently need to expand their workout units—no small matter, as these skills are hard to come by,” the firm noted. “These moves will help banks establish the needed comprehensive approach to loss mitigation.” Although lending margins will likely remain higher for a time, the firm believes that this relief with CRE lending will be transient. “As the next property boom takes hold (or perhaps even before), memories will fade, capital will re-enter the business, competition will increase, and a willingness to downplay risk will once again push industry margins down,” the firm highlighted. There is also a new era of regulation in which shareholders could bring challenges to CRE lenders. “If governments should impose, say, domestic lending requirements on the banks they “own,” that could undermine banks’ need for more careful risk assessment and pricing discipline, and could reduce lenders’ ability to select the most attractive deals.”