Finance  ·  Analysis

Lending Volumes Expected to Fall Below $500B in 2023: Moody’s

A second quarter national report highlighted falling LTVs and “higher-for-longer” interest rates


Commercial real estate lending volumes are estimated to dip below $500 billion in 2023, a drop of 38 percent compared to the $816 billion originated last year, according to a new Moody’s Analytics report. 

The year-over-year lending decline is largely due to uncertainty around interest rates and falling transaction volume among specific asset classes like office and retail.  

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The dour conclusions came from a Moody’s quarterly economic briefing on the second quarter of 2022, which cited newly released estimates from the Mortgage Bankers Association (MBA). Despite the year-over-year declines in lending volumes, the MBA data predicts a stabilization of interest rates over the next 12-to-18 months and for CRE lending volumes to quickly recover, reaching $856 billion in 2024 and nearly $1 trillion in 2025. 

Economists at Moody’s, however, said to take those rosy predictions with a grain of salt. 

“We would suggest some healthy skepticism about how quickly commercial real estate debt markets will rebound,” said Kevin Fagan, Moody’s senior director of CRE economic analysis. “There are a number of challenges that will take significant time to work out.”

Fagan emphasized that CRE debt markets normally take multiple quarters to recover from major economic downturns. He noted that following the COVID-19 downturn in 2020 and 2021, it took five quarters for lending to turn positive, and, after the 2008 and 2009 Global Financial Crisis, it took nine quarters before lending turned positive. 

The economy is currently mired in four consecutive quarters of declining lending volumes. 

“It seems clear that we’re [now] in for another two quarters of lending retraction, which would make it six consecutive quarters of retraction for this downturn,” Fagan said, adding that it could even turn into eight consecutive quarters of lending retraction if things don’t break right. 

“This could indeed be the case with the higher-for-longer interest rates that the Fed seems intent upon,” he added.   

Fagan also cited data from an August 2023 Federal Reserve senior loan officer survey that revealed a capital market environment with “significantly tightened lending standards.” 

Loan-to-value ratios for all asset classes have moved closer to 50 percent than 60 percent, on average, which is far below the pre-GFC peak of 72 percent LTV ratio averages, according to Fagan, who cited falling debt service coverage ratios as the prime culprits for the industry-wide drop. 

“All of this is largely driven by continued pressure from higher interest rates, which may be the norm for a while,” Fagan explained. “Therefore, we could reasonably be looking at 2024 as a transition year rather than a return to boom times for CRE lenders.”

One piece of good news that the Moody’s team of economists highlighted is that it no longer appears like the U.S. will enter a recession in 2023. 

GDP growth in the second quarter of 2023 came in at an annualized rate of 2.4 percent. The national unemployment rate sits at a near-record low, while the overall inflation rate declined from 7 percent at the start of the year to 3 percent in August, according to data presented by Moody’s. 

However, even with these positive tailwinds, the outstanding pressures across the CRE investment space make it unlikely that the industry will do more than continue to slug along. 

“Recession probabilities are declining as inflation subsides, the labor market continues to shrug off higher interest rates, but CRE is far from out of the woods,” said Thomas LaSalvia, head of commercial real estate research at Moody’s. “Financing costs are set to remain elevated, conservative lending practices have become the norm and, given this, there is still some pain in store for the CRE industry.” 

LaSalvia noted that the baseline 10-year Treasury rate is forecasted to remain at the four percent range “for the foreseeable future,” and that the Fed should not be expected to cut rates anytime soon. 

“This is not quite what many potential sellers of CRE assets want to see at this point, as this will force an acceptance of a pricing reset before transaction activity can resume,” he said. 

The country should expect a “slowcession,” or below average growth for the economy for the rest of the year, and for the Fed to ignore warnings and remain firm in its current interest rate policy, according to Moody’s analysis. 

“While this is not going to be enough for the Fed to pivot in terms of reducing rates until probably sometime in 2024, it will be enough to soften the labor market, put further downward pressure on consumer budgets and cause CRE rent and occupancy performance to struggle in the short run,” said LaSalvia. 

“It is truly a fascinating time to study the economy of the commercial real estate industry,” he added. 

Brian Pascus can be reached at