November 15th, 2024
Cautiously Optimistic:
Note: See links at the bottom of this email for some interesting recent report releases from the past week.
1. As noted last week, recent loan extensions and borrower preferences for shorter term 3-year and 5-year loans since the pandemic is irrefutably increasing the need for significant borrowing in the coming years. With the 10-Year UST climbing back into the mid 4's, many are cautiously optimistic about what the current election results mean for the CRE industry in the coming years as a whole. The US economy is showing its strength, and todays Retail Sales report continued the theme that the US consumer is still spending more aggressively than expected. Even with a CPI print in line with expectations, it's obvious that traders are looking at some of the new administrations policies as potentially inflationary and Fed speakers have been actively stating that they may not be willing to cut rates as fast as the market expects if the data doesn't support it. Currently the consensus is that the Fed will pause at a target rate of 3.5%, implying that 3-4 additional 25 bp cuts will take place through mid 2025.
2. Commercial and multifamily mortgage loan originations surged by 59% in the third quarter of 2024 compared to the same period last year, and by 44% from the previous quarter according to the MBA. This growth was driven primarily by lower interest rates, with the yield on the Ten-year Treasury bond dropping from 4.31% in June to 3.72% in September. Originations varied across property types, with significant increases in healthcare (+510% YOY), hotel (+99%), retail (82%), industrial (57%), and multifamily properties (+56%), though office property originations saw a slight decrease (-3%). The volume of loans originated also grew across different investor types, including a major spike in loans for CMBS (+260% YOY) depository loans, and government-sponsored enterprises like Fannie Mae and Freddie Mac.
It will be interesting to note how the Q4 data plays out heading into 2025 as the current 10-Year UST is sitting at 4.45%
3. CBRE US president of debt and structured finance James Millon highlighted a few observations that aligned with the MBA sentiment noted above in Q3.
"We saw a notable uptick in acquisition financing compared to the prior quarter, a notable area of lending strength was the single-asset, single-borrower CMBS loan.
Debt funds have seen a 70% origination surge YOY
Average LTV increased slightly from 61.6% to 62.8%
4. Retail, specifically urban retail is benefiting from strong consumer spending. JLL notes that, "Urban retail's share of multi-tenant, single-asset transaction volume recovered to a five-year high for YTD Q3 in 2024, comprising 14% of the total and a 180% increase YOY."
5. According to a Trepp report, CMBS (Commercial Mortgage-Backed Securities) loan losses dropped in October, totaling $47.3 million across 10 loans, compared to $139.5 million the previous month. The average loss severity was 62.52%. Over the past year, October saw the smallest loan resolution amount at $75.7 million, while January had the largest at $828.4 million. The highest loss severity in the past year was 81.47% in April. Loss severity has generally risen, from 55.99% in November 2023 to 65.90% in October 2024.
6. HUD has issued draft program changes reducing DSCR to 1.15x and increasing the LTV to 87% for market rate refinances (80% for cash out). With a 35 year fixed-term and a 35 year amortization, HUD is a great tool for multifamily refinances that are proceeds sensitive.
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News and Notable Reports
