30 Comments from CRE Lenders

There was a major commercial real estate finance conference held in Vegas 10 days ago. I reached out to 15 lenders that attended and asked about their top 2-3 takeaways.

Here’s what they had to share:

Transaction volume is substantially lower:

1. “There was an acknowledgement that volume is down this year.”
2. “Every major broker shop projected that volume would be down 50% year-over-year. Exception was some of the smaller guys whose client base seem to be more active – those guys are down like 20%.”
3. “Loan production way down. Few players actually active, many quoting to lose.”
4. “Everyone I spoke with (broker or lender) production was off anywhere from 40% -70% from 2022.”

People are starting to believe that rates will be higher for longer:

1. “Folks starting to be believers of what has felt for a while like a higher for longer environment. No longer seeing borrowers have long runways to play the rate games, and more conviction that the Fed will remain Hawkish in tone and policy, so folks will need to figure out solutions for impending maturities that they’ve been putting off.”
2. “Higher for longer is taking hold.”
3. “I personally think high rates are here to stay for a while.”
4. “Lot of confusion as to where things are headed. Words out about high rates for longer and a wall of maturities, and that seems to be calm before the storm.”

Lenders are being cautious:

1. “Very defensive posture among majority of lenders throughout 2023 and unfortunately expected to continue into late 2024; capital is content to sit on sidelines for an indefinite amount of time; very risk-off approach due to uncertainty not only around interest rates/cap rates but recently now also concerned about rent declines across all asset classes (ie multifamily and industrial…obviously the others as well).”
2. “Most groups seem to have money to put out but are being cautious and generally prioritizing credit over stretching for yield”
3. “Lenders are predominantly focused internally (managing through their own balance sheet exposure) rather than originating new business”
4. “Brokers are doing a lot of BOVs but nothing is happening with them. Still the bid/ask gap and groups not willing to accept where values are if you are looking to sell now. This is resulting in more modifications/asset management work for lenders as borrowers look to extend/restructure”

Loan asset management is the primary focus for many:

1. “Even for those with allocations to originate, many are so busy with workouts/extensions/foreclosures that they don’t have time to actively focus on new originations.”
2. “Lots of talk about balance sheet issues – everyone has them. Seems like the first group meeting where every lender is finally willing to admit that there’s current / looming asset level issues.”
3. “Many lenders on the sidelines as they’ve become asset managers dealing with legacy problems.”
4. “People are spending a significant portion of their time on office loan workouts – and expecting that to pick up even more in the coming quarters.”

Comments on 2024:

1. “Heard a lot of optimism about 2024, but it sounded more like wishful thinking than anything. Some think rate stabilization and potentially decline will kickstart everything back into action.”
2. “Lot of confusion as to where things are headed. Words out about high rates for longer and a wall of maturities, and that seems to be calm before the storm.”
3. “Overall, I think most were hopeful for a turn-around in the 4th Q and 2024, and that a steady rate environment can help to deliver this expectation.”
4. “Lenders and brokers both seem cautiously optimistic for 2024 (mostly second half).”

Other interesting comments:

1. “Cost of ‘rescue’ pref equity is too high. Very few owners ready to take mid-to-high teens pref. For now, they are choosing to push their existing lenders to work with them, ie give them time and hope things improve within 12 months.”
2. “Any loan getting done right now feels like a hard money loan (high all-in rates, a bridge to a better day, etc) when compared to deals being done 2 years ago.”
3. “Core / Core + capital still the most active, with levered lenders still challenged en masse to be holistic capital providers for the full stack (but some thawing in the debt fund space for high quality deals).”
4. “Bridge lenders really struggling with financing (warehouse line liquidity; volatile / wide CLO market)”
5. “Projects are getting hit on value due to cap rates and on DSCR refi analysis, so values are down and borrowing ability is down. That part we all know. Since even private debt is only achieving sub-65% LTC on most deals, the check size is too big for friends and family/passing the hat around. For 35% equity checks groups are used to going to institutional groups. Those institutional groups A) don’t want to borrow high octane expensive debt at low leverage, and B) have generally shifted their strategies to pref equity/mezz/opportunistic bucket. So, there is a void in the LP equity space where developers can’t fill up the cap stack, and deals are getting shelved.”
6. “Right now groups can extend or get through it but everybody has a boss and when the boss says it’s time to pay back, it will trickle down quickly through the system”
7. “A couple of office trades in SF at ~20 cents to prior value; first trades will have ripple effects, with a lot more to come”
8. “There is a stalemate on cap rates/values, especially in the highest desirable multifamily, industrial and self storage. Everyone realizes negative leverage doesn’t work, but it will take time to adjust. For example, in multifamily, the aggressive bridge loans over the past three years upon maturity will start providing the distressed comps. The loan maturities will help this re-set process. I said, the worst loans we will probably do as an industry were the short-term bridge loans over the past few years.”
9. “The banks are loaded with CRE, I believe $3.6 trillion. This is more like the early 1990’s than the GFC – the regulators and Wall Street will punish high concentration CRE lenders. Improper hedging will impact net interest margins. The decade plus of the bank permanent lender may be over and people are starting to get curious again about CMBS.”
10. “For the first time in even long careers, there is value in existing Defeasance loans, especially loans that are close to maturity. It is counterintuitive because you think most Borrowers would want to hold on to their 3 to 4% rates through maturity, with a 5.4% one-year T-bill, they can pay their loans off at a discount.”

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