Finance  ·  Analysis

CRE Lending Down 52 Percent Annually: Newmark

Loan originations by debt funds are down 73 percent; CMBS originations have dropped 79 percent


If the headlines hinted at struggles in commercial real estate, then just wait until you see the data. 

A second quarter 2023 U.S. capital markets report from Newmark (NMRK) found CRE debt origination volumes have declined by 52 percent year-over-year, and that the current market has 32 percent fewer lenders than it did at this time last year. Moreover, while private equity sits on a record $219 billion of  dry powder, that might not be enough to stave off the wave of $625 billion in CRE debt maturing over the next three years. 

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“The market has been in a state of continuous change and uncertainty,” David Bitner, executive managing director of global research at Newmark, told CO. “Lenders demand lower [loan-to-values] , and higher [interest] rates, and are overall much more selective on what deals they will finance. 

“Investors are asking for both lower prices when they are buying and, at the same time, have been hesitant to meet the market when selling,” he added.  

The decline in origination volume has occurred in some measure across all CRE asset types in the last 12 months, with different lending sources — banks, debt funds, commercial mortgage-backed securities [CMBS]  — all experiencing a collective pull back. 

Loan originations by debt funds are down 73 percent year-over-year, while CMBS and collateralized loan obligations  originations dropped by 79 percent from July 2022, according to Newmark data. 

CRE lending volume in the banking sector is down 48 percent in the last year, with much of that decline occurring amid the highest interest rate spike in 40 years and the March-April regional banking crisis — the most significant financial crisis since the 2008-2009 GFC. 

“I think you’d have to go back to 2009 for a similar contraction in activity, though the current environment proves more optimistic,” said Bitner, who added that debt funds are well-positioned to replace banks as the prime source of industry lending going forward. “I predict that banks will be less active as a source of credit in CRE in the coming years.” 

Few places in the CRE universe have seen less activity in 2023 than the securitized markets. While the CMBS market began to experience its initial tremors of discontent in mid-2022, the first quarter of 2023 marked the lowest volumes of CMBS issuance since 2008. Even though CMBS issuance rose 57 percent in the second quarter of 2023, those issuance volumes were still down 59 percent year-over year, casting a pall over the securitized market heading into the final two quarters. 

“The current environment of the new issue market suggests that an immediate solution is not yet foreseeable,” Bitner said. “Should the new issue market improve, it will still take time for the origination for the securitization machine to get moving again.”  

As lending volumes have collapsed, equity markets have also stalled, with transaction volumes muted. Investment sales declined 62 percent year over year, making the first half of 2023 the weakest half since 2013. 

“The values of assets are falling with the result that not only do potential buyers and sellers face a still volatile outlook, but buyers especially are wary of catching a falling knife,” the report concluded. “This is even more the case given the large number of buildings are on their way to becoming distressed. Loans will need to be restructured before these assets can trade.” 

One bright mark that Newmark found for CRE capital markets is the record amount of dry powder private equity closed end funds raised in 2023. 

The private equity industry has raised more than $219 billion for equity or debt investments in the opportunistic and value-add space. This potential source of capital for CRE investments and distressed purchases could potentially stave off some office defaults in the months ahead and provide a boon to sectors like multifamily and industrial, that have seen a transaction slowdown. 

“We estimate that over half of this capital is targeted at multifamily assets, with most of the remainder focused on industrial assets,”  the report concluded. “The capital targeting office and retail assets is quite small by comparison, which could ultimately represent a contrarian opportunity.” 

But even if the private equity landscape is providing a sense of relief amid the broader capital markets retrenchment, there’s not much that can be done to stop the tidal wave of CRE debt that comes due in 2023, 2024 and 2025. 

Bitner noted that while private equity is likely to be “the force” that leads to a market resurgence, that side of the industry alone cannot re-inflate CRE values to where they were when the 10-year Treasury was trading at 1 percent. 

“What they can do is drive recapitalization of assets once assets have repriced to the new environment and debt has been restructured,” he said. “The next cycle will start with a full tank of gas.”

Newmark identified that roughly $1.2 trillion of outstanding CRE is “potentially troubled,” after examining mark to market LTV ratios, and the structure of individual debt maturities. More than $626 billion of CRE debt matures over the next three years, with the main trouble spots appearing in multifamily and office, according to Newmark. 

“The high office volume results from most loans being underwater,” the report concluded. “The distribution of LTV ratios for multifamily are more favorable overall, but the greater size of the multifamily market and the concentration of lending during the recent liquidity bubble drive high nominal exposure.” 

U.S. banks carry the most of this potentially troubled debt, according to Newmark. U.S. banks account for 51 percent of CRE maturing between 2023 and 2025 and 48 percent of potentially troubled loans in that period, with debt funds, insurance companies and the securitized market filling out the rest of the troubled ratio of loans. 

Even so, Bitner is confident that the combination of interest rate clarity from the Federal Reserve and buyers and sellers coming to some sort of price recognition agreement across asset classes in the face of a maturity onslaught will all bode well for capital markets in 2024. 

“The market is well-positioned for increased capital markets activity in 2024,” he said. “I’m optimistic that this impasse will break in the next six months.” 

Brian Pascus can be reached at