As observed by Ali Ata, these unprecedented times have resulted in new challenges to institutional lenders and banks in the commercial real estate mortgage and transaction markets.

A pandemic-driven credit market freeze that began in March and ended in early April resulted in a marked decrease in loan closings in the second quarter of 2020. Commercial real estate (CRE) loan closings plummeted by approximately 20.5% year-over-year, according to the CBRE Lending Momentum Index.

A concentrated effort from major lenders and the Federal government injected liquidity back into the market during the latter part of Q1. Since then, there has been an increase in the number of commercial real estate loan applications, says Ali Ata. However, lenders are likely to continue to be selective when it comes to properties to finance. Hard-hit sectors like retail, hospitality, and value-added commercial real estate are subject to greater scrutiny by wary lenders and face underwriting challenges as lending standards tighten.

Delinquency rates continue to rise

The pandemic situation has resulted in a drastic decrease in commercial real estate utilization and profitability in the travel and hotel segments. Offices are empty as employers put work-from-home arrangements in place, hotels are vacant due to travel restrictions, and customers are staying away from malls, opting instead to make e-commerce purchases.

Ali Ata says that due to decreased business activity, commercial property owners are faced with such problems as late- or non-paying tenants. As a result, they struggle to make payments on the loans they took to finance their properties. Those whose loans, made pre-COVID, were aggressively underwritten are at even greater risk of falling behind on mortgage payments.

 The impact became very apparent in June when delinquency rates rose, as observed by Ali Ata. Loan credit stress in the retail and hotel sectors pushed the overall delinquency rate of CMBS from 1.24% in March to 6.37% just three months later. The hotel and retail real estate segments had the highest delinquency rates: 22.82% and 17.68%.

 Regional banks are driving growth in loan originations 

Ali Ata points out that many mortgage REITs, debt funds, and alternative lenders experienced liquidity challenges due to economic conditions. For this reason, they sourced a few loans in Q2. Meanwhile, banks originated more than 70% of CRE loans during this period. Regional banks are responsible for much of this growth.

 Outlook for the commercial real estate lending markets

It is impossible to predict the magnitude of the pandemic’s impact on the CRE mortgage markets in the coming years. However, Ali Ata identifies signs of growth in the industrial real estate and logistics segments. While there is cause for optimism, real estate professionals involved in at-risk sectors like hospitality and retail should prepare themselves for a rough road ahead.