U.S. Tax Reforms Drive Favorable Commercial Real Estate Loan Pricing

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According to global real estate consultant CBRE, the enactment of comprehensive tax reform in the U.S. contributed to strong investor sentiment and a favorable commercial real estate lending environment at the end of 2017.
 
CBRE's Lending Momentum Index, which tracks the pace of U.S. commercial loan closings, fell slightly by 1.2% in Q4 2017. Compared to a year ago, December lending volume was down by 15.9%; however, December 2016 loan closings were high, as the Index approached record levels. For the full-year 2017, CBRE's Index averaged 237--14.5% higher than 2016's level.
 
"With the recent enactment of comprehensive tax reform and relatively favorable treatment of commercial real estate as an asset class, we expect continued strong investor interest in the sector. Significantly lower maturing loan volumes in 2018 and good supply/demand equilibrium should continue to result in favorable loan spreads for borrowers," said Brian Stoffers, Global President, Debt & Structured Finance, Capital Markets, CBRE.
 
A more balanced lending market emerged in Q4 2017, as major lending groups made relatively equal contributions to lending volume than they did in Q3 2017 and a year ago. Life companies continued to lead other major non-agency lenders in Q4 2017, capturing just over 30% of the market--down from 34% a year ago. Over the past year, life companies have been competitive with other major lenders for lower LTV originations.
 
Bank originations rebounded in Q4 2017 to take second position among major non-agency lending groups at 28.7%--up from approximately 18% in Q3 2017. While banks may remain cautious on certain types of construction loans, they continue to quote loans on both stabilized and transitional properties.
 
After a very active Q3 2017, CMBS conduit originations returned to a more sustainable level in Q4 2017 as loan maturities began to ease. CMBS originations have been aided by improved pricing and the successful development of structures to satisfy lender risk-retention requirements.
 
CMBS issuance totaled $88 billion in 2017, ahead of 2016's $76 billion. Spreads on new-issue, 10-year, AAA-rated paper hovered around swaps + 90 basis points (bps) for most of the year, but tightened in Q4 2017. As of early January, spreads compressed to swaps + 75 bps. With fewer maturing loans in 2018, CMBS loan pricing fundamentals should remain favorable.
 
Combined Fannie Mae and Freddie Mac multifamily loan purchase volume reached a new record of $139 billion in 2017--up from $112.6 billion in 2016.
 
CBRE's Loan underwriting was slightly more aggressive in Q4 2017, as average loan-to-value ratios rose while debt yields fell. The percentage of loans carrying interest-only terms rose to 66% in Q4 2017 from 57.8% in Q3 2017.