After an unsettling period of volatility in January and February, credit markets rebounded strongly in March as equity and bond prices rallied. Commercial lending markets, which were briefly derailed by the volatility, were back on track by early April. A 20%* (9% for single-asset sales) year-over-year drop in investment sales during Q1 curtailed demand for financing, according to Real Capital Analytics (RCA).
The CBRE Lending Momentum Index declined by 6.3% in Q1 2016 from its 2015 year-end close of 194. However, the index shows positive momentum on a year-over-year basis, with loan closings up by 8.8% as of March.
The CMBS market showed significant volatility in Q1 as spreads on new-issue 10-year AAA bonds widened over swaps +170 basis points (bps) in early March, before recovering to a more normalized level of +130 bps in early April—only slightly above its 52-week average. As a result, CMBS issuance in Q1 2016 totaled only $19 billion, down 29.5% from the year prior.
With CMBS originations stalling, bank lenders contributed disproportionately to overall non-agency loan closings tracked by CBRE Capital Markets. Banks accounted for 43% of originations in Q1 2016, up from 28% in Q1 2015. In contrast, CMBS conduits accounted for only slightly more than 10% of deal volume, one of the lowest quarterly market shares in several years.
In Q1, CBRE’s loan underwriting measures compared favorably with Q4. In particular, the percentage of loans carrying partial- or full-interest-only terms remained below the 60% mark for the second consecutive quarter.
Rising loan maturities, which will be especially pronounced in the CMBS sector, will boost the demand for financing as the year progresses. CBRE projects that approximately 18% of the $78 billion scheduled to mature in 2016 may face some difficulty in refinancing.
