How Inflation, Rising Interest Rates and More Are Affecting Bank Lending in 2022

The bank lending environment, like the rest of the commercial real estate world, has dealt with numerous factors over the past two and a half years that have turned it on its head – from the pandemic to global inflation to various sectors over- or under-performing compared to their pre-pandemic numbers. Partner Insights spoke to Chris Niederpruem, managing director and group head of real estate finance at CIT, a division of First Citizens Bank, to learn more about where bank lending stands today.   

Commercial Observer: We spoke last fall about the bank lending environment for commercial real estate. What are some of the biggest changes in this environment since then?

Chris Niederpruem: The most obvious change from last fall is the interest rate environment, which has changed the way commercial real estate investors and lenders look at their underwriting. Debt is a big component of how investors make decisions around deals. With higher interest rates, the likelihood of additional rate hikes and the looming backdrop of a potential recession, it’s a significantly different landscape than we saw 6-six to 12 months ago. The cost of debt is higher, so in many cases there’s reduced leverage on commercial real estate deals. The piece of the puzzle yet to play out is how that will impact valuations. This rate environment is not something we’ve seen in a very long time. 

How has this impacted this segment of the industry’s competitiveness?

The competitive landscape has certainly changed. Last year, when we were emerging from the worst of the pandemic, there was a lot of pent-up demand for investing and lending in commercial real estate, and a lot of capital had been raised. So last year was a record year for deal volume in the industry and it was extremely competitive. Now, with the change in the interest rate environment and some of the other changes in the capital markets, there’s been less deal volume. Buyers and sellers are moving much more slowly to transact. Some lenders have stepped away or slowed their appetite for lending, which has created opportunity for other lenders and investors. It’s still a competitive sector, but a bit more measured than in 2021.

How has the rise in inflation affected the commercial real estate lending landscape?

Increased material and labor costs have impacted construction.  Additionally, when you’re looking at the future cash flow of a property, you have to account for higher expenses and then try to balance that against growth on the revenue or rent side. How much growth remains in some of the markets that have seen historic rent growth? For example, some of the Ssoutheast markets have seen double-digit rent growth in multifamily apartments over the last year. How much more growth is left relative to the inflationary impact on the expense side? Those are things a lot of lenders and investors have been forced to think about in a heightened way.

In addition to inflation, are any other national or global events affecting the lending landscape these days?

There’s been dislocation in the capital markets, including uncertainty around international affairs, interest rate hikes and potential recessions to come. Those things have upset the capital markets, raising challenges for lenders that finance themselves that way. That has changed their ability and appetite to lend as they did in 2019 and 2021. (I’ll skip 2020 for obvious reasons.) So that’s a challenge for some lenders and an opportunity for other lenders. 

Has there been a shift in the demand for certain lending products throughout all this?

Yes. The most obvious is that, in many cases, investors are looking for longer-term and more fixed-rate lending products than in the past. It’s a common shift when you’ve got such a fast-rising interest rate environment. That’s what we’ve seen, and I think most lenders have seen more requests for that type of product.

Overall, how would you characterize the state of the commercial real estate lending market for lenders today?

I think it’s a responsible environment. Lenders have maintained underwriting standards. Leverage hasn’t gone crazy. Structures haven’t gotten too loose. There’s still a lot of equity capital in deals, now probably even more than last year. The floodgates were seemingly open in 2021, and most lenders had a record year. In 2022, it’s been a bit more of a measured environment. But there’s great opportunity for lenders that are still able to be active in the market. Some lenders are facing headwinds in how they capitalize themselves. Other lenders, however, are finding great opportunities to do business with strong sponsors, great real estate and very conservative leverage and lending structures.

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