The US commercial real estate debt market is experiencing a rare period where borrowers expectations are being met, lenders are being adequately compensated for their risk and ample liquidity is preventing widespread distress, according to Brian Stoffers, global president of debt and structured finance for capital markets at CBRE.
“We’re in that sweet spot of a cycle where there’s abundant capital,” Stoffers told Real Estate Capital USA. “[Borrowers] are getting a little bit more aggressive, and feel very good about the competitive environment.”
Meanwhile, lenders are getting compensated for high-risk deals and feel the risk-adjusted returns are fair in such a competitive market. “It is a very good time to be a borrower, and frankly, it’s not a bad time to be a lender either,” he said.
Stoffers comments come against the backdrop of the firm’s third quarter CBRE Lending Momentum Index, which tracked a 31.6 percent increase in lending volume from the second to third quarters. The firm also found alternative lenders were a major force behind the surge in commercial real estate lending activity in the third quarter, making up almost 40 percent of the loans originated.
“There is abundant capital from banks and life companies in US real estate debt markets,” Stoffers said, noting that the commercial mortgage-backed securities conduit market has seen a resurgence after a slow start to the year. “[These markets] have really come roaring back in 2021. But the big news is the debt funds have really expanded dramatically.”
The topic of inflation is one that is being more widely discussed. Stoffers noted, however, that inflation and real estate have a long and well-documented relationship. One of the effects of inflation, Stoffers noted, is rising rents.
“From a from a lender’s perspective, interest rates have actually gone up slightly [and] they are able to achieve returns for their investor base that are better than they were six months ago,” Stoffers added.
The downside, however, is the impact that inflation has on construction costs due to increased cost of labor and raw materials.
“On the other hand, [inflation] is keeping construction in check to some extent,” Stoffers said. “The equilibrium is pretty good, there’s a lot of money going into equity purchases so, borrowers are putting more cash into deals [which is] also viewed by lenders as a positive.”
One factor that could affect the supply of raw materials in the US is a possible slowdown in construction in China. “If China slows down the construction of buildings, then that might take off some of the pressure on raw materials like cement, steel, timber, which could taper the rise in pricing.”
Stoffers noted the recovery from the pandemic appears to have happened very rapidly for commercial real estate. “Eight months ago, nobody would have said we would be back to record levels in 2021,” he said.
But unlike the global financial crisis, the pandemic-related downturn was not caused by aggressive lending. “The downturn we experienced from covid was far different and lenders took a very different approach to how they handle borrowers because it wasn’t anything to do with poor lending, or poor underwriting,” Stoffers said. “But rather, it was an outside influence that they had no control over. So, I think that the markets responded much more rapidly to the recovery as a result.”