Mortgage rate spreads: Debt markets see significant decline in originations

Spreads on new commercial real estate loans widened in October, new issue commercial mortgage-backed securities market as well as pricing from agencies.

The US commercial real estate debt markets continue to see depressed volumes, with the Mortgage Bankers Association forecasting a 46 percent decline in origination volumes for 2023. The Washington, DC-based trade group is projecting about $442 billion of commercial and multifamily loans this year, with Fannie Mae and Freddie Mac, private lenders and debt funds, and life insurance companies stepping up to fill the void left by regional and national banks.

Spreads on new commercial real estate loans widened in October, with the impact being seen in both the new issue commercial mortgage-backed securities market as well as pricing from the agencies that are roughly 10 basis points wider, according to data from Cushman & Wakefield. The Chicago-based brokerage firm also reported seeing positive traction on debt fund spreads for strong collateral. “Notwithstanding this fact, the best all-in pricing is mid- to high 6 percent, given the recent increase in base rates,” according to a report released in November.

A major factor affecting pricing of new loans has been activity in the Treasury market, with the yield on the 10-year US Treasury rising by about 50 basis points and, in late October, briefly hitting the 5 percent range. This has affected pricing and the market continues to recalibrate loans, Cushman research says.

Despite the continued depressed origination volume, a November report from Dallas-based brokerage CBRE posits that the market is showing signs of stabilization. The firm’s quarterly Lending Momentum Index, which tracks loans closed by broker CBRE, dropped by 3 percent from the second quarter of 2023 and 47.9 percent year-over-year.

“While capital markets headwinds continue, we are seeing signs that lending conditions may be stabilizing for certain asset classes,” says James Millon, US president of debt and structured finance for CBRE. “Credit is gradually loosening, cap rates are resetting higher and the Fed’s rate hiking campaign may be near the end, which collectively could pave the way for an uptick in deal volume in the second half of next year.”

CBRE found that banks continued to account for the largest share of non-agency loan closings for the sixth consecutive quarter. Additionally, construction loans made up about half of all lending volume in the third quarter. Another third comprised refinancings, with the remainder allocated toward property acquisitions.