Mortgage rate spreads: Debt markets remain constrained

Loan originations were roughly flat in July and August, with a tilt toward construction financings or refinancings of stable properties.

The US commercial real estate debt markets remain constrained, with interest rates expected to be higher for longer and lending down significantly on both a year-on-year and pre-pandemic basis.

According to Cushman & Wakefield Equity’s debt and structured finance commercial mortgage rate spreads for August, the five- and 10-year US Treasury spreads have risen by 12 and 14 basis points, respectively, over the past month. The advisory’s rate spreads reflect average deals, but the firm does see pricing on higher-quality assets inside the pricing reflected and lower quality or assets with more risk pricing higher, notes Christopher Moyer, executive managing director.

Newmark, the New York-based advisory firm, estimated that debt origination activity dropped 52 percent through the end of the second quarter when compared to the same period in 2022. It also estimated that debt originations are down by 31 percent compared to pre-pandemic numbers and noted that the number of active lenders has dropped by 32 percent since the second quarter of 2022.

“Originations are down sharply across property types and lending sectors, though office, debt funds and commercial mortgage-backed securities and commercial real estate CLOs are negative outliers. The bigger issue is that the small and regional bank lending engine that has driven the commercial real estate market is rapidly slowing with no clear replacement,” the report stated. “All this is occurring at the same time as the market is set to absorb $1.4 trillion in debt maturities in 2023-25 – debt that will mature with significantly higher debt costs than when loans were originated.”

Moreover, the report estimated potential troubles for about $626 billion of debt maturing in 2023 to 2025. Still, loan originations were roughly flat in July and August, according to data from Real Estate Capital USA, with a tilt toward construction financings or refinancings of stable properties.

Key deals included Canyon Partners Real Estate and JPMorgan’s origination of a $174.6 million loan on behalf of GBT Realty Corporation and Koch Real Estate Investments to recapitalize One22One, a trophy office tower in Nashville. JLL Capital Markets arranged the financing.

Meanwhile, Goldman Sachs Asset Management originated $233 million of financing for a project in the Brooklyn neighborhood of Crown Heights. It willl fund the ground-up development of the 569-unit property, 54 Crown Street, with the floating-rate loan.