CRE Finance Outlook: Positive
Lenders expect to increase originations this year, while equity sources are stepping up.
With the cessation of interest rate hikes has come increased confidence in recovery, even if it’s not quite here yet and the office sector still faces immense struggles. Both the Mortgage Bankers Association and the CRE Finance Council surveyed members at the end of last year and found a shift in outlook to a distinctly more favorable view in 2024’s fourth quarter.
That’s good news for investors. While a mild recession is currently predicted at that time and both surveys turned up much greater confidence for 2025, an increasingly positive lending outlook suggests capital availability this year, which will allow deals to occur.
In fact, while “stay alive till ‘25” has been the rallying cry of the current era, harking back to Sam Zell’s similar call about 1995, there’s a new mantra making its way around, Jamie Woodwell, head of commercial real estate research at MBA, noted in a recent blog post: “Do more in ’24.”
How much more? While uncertainty in valuations and cap rates continues to have a negative impact on the capital markets, according to the MBA survey, 21 percent of respondents anticipate a 5-10 percent increase in originations volume this year and another 47 percent expect an increase of up to 5 percent. Only 10 percent expect a decrease. Meanwhile, 77 percent said their own firm will increase originations, with 24 percent expecting to increase originations more than 10 percent.
CREFC survey respondents, similarly, expressed a far more positive than negative outlook for the next 12 months, the first time they had a more optimistic weighting since their fourth quarter 2021 survey (though 44 percent of respondents remained neutral).
That’s encouraging at a time when valuations and cap rates are still tough to measure, and when borrowers who had been waiting for interest rates to settle begin to address maturing loans, as Fotios Tsarouhis discusses in “Alternative Financing Is CRE’s Lifeline.”
While lenders’ appetite is growing, though, sources of debt are still shaking out. MBA survey respondents tended to lean toward expecting volume increases among the government-sponsored enterprises, life companies and investor-driven lenders, with contributions from CMBS and bank providers likely remaining flat. CREFC respondents expect a reduction in bank lending but an increase in CMBS, with the majority anticipating a 25 to 75 percent increase in private-label CMBS issuance this year. On the other hand, they also expect increases in preferred equity, mezzanine debt and PACE financing to fill a debt gap.
“There has been a significant secular shift in the sources of financing for commercial real estate borrowers over the past 18 months,” Brian Good of iBorrow told Tsarouhis.
Be sure to also check out the results of our 2023 Top Mortgage Banking Firms survey, which found relative strength despite an overall decline in lending activity.