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A snapshot of the booming US real estate debt market

Macroeconomic tailwinds supported lenders stateside in the last three months of 2019.

Interest rate reductions by the US Federal Reserve and continued growth across the country’s economy supported high levels of commercial real estate lending activity in the final quarter of 2019, according to new research.

The findings, compiled by Los Angeles real estate consultancy CBRE, provide a snapshot of a healthy US property debt market. For European real estate finance professionals, who often claim Europe’s market is gradually evolving to look like North America’s, the research contains much to ponder.

CBRE’s Lending Momentum Index, which tracks the pace of commercial property loan closings in the US, reached an indexed value of 263 in December – in line with the previous quarter, but up 4.2 percent from Q4 2018.

As Brian Stoffers, global president of debt and structured finance for capital markets at CBRE, explained, a favourable capital markets environment for the overall US real estate sector provided the right conditions for strong property lending activity in the closing months of 2019.

The data show just how diverse the US market is, compared to Europe, where non-bank lending organisations remain a small, but growing, part of the finance market.

CBRE data show alternative lenders in the US – including mortgage real estate investment trusts, debt funds and private finance companies – accounted for 41 percent of total non-agency real estate lending in Q4 2019, up from 29 percent in the previous quarter, and up by the same amount from Q4 2018. According to Stoffers, alternative lenders will be an important source of capital in the US in 2020, particularly for bridge and construction finance.

Although direct lending from insurance companies remains a niche of the European market, life insurance companies accounted for 21 percent of non-agency volume in the US during Q4, albeit down from 29 percent in the previous quarter. The fact that CBRE lists life insurers among the ‘traditional’ lenders in the US hints at their longstanding role in that market, compared to Europe.

Banks’ share of the US real estate lending market in Q4 stood at 26 percent, down from 35 percent a year earlier. While overall comparable European data is not available, most estimate that banks represent at least three quarters of Europe’s overall real estate debt market. However, as European market sources say, a continued flow of institutional capital into Europe is reshaping the make-up of the market.

In a further contrast to Europe, commercial mortgage-backed securities are a huge slice of the debt capital behind US real estate. CBRE data show CMBS lenders accounted for 12 percent of total volume in the final quarter. Tight pricing supported CMBS and corporate bonds – between October 2019 and late January 2020, spreads on benchmark 10-year, AAA-rated CMBS notes narrowed, by almost 20 basis points, putting CMBS issuers in a good position to build on 2019’s issuance levels of $97.8 billion.

Despite the high levels of lending in the US late into the real estate cycle, CBRE also noted increasingly conservative loan underwriting. Debt service coverage ratios were generally higher, and loan-to-value ratios lower, the consultancy said. With CBRE predicting as much as $502 billion of investment into US real estate in 2020, lenders will be hopeful for another busy year.

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