Commercial Real Estate Lending Eases in Q2 2020 as Underwriting Turns Conservative

​Commercial real estate mortgage markets navigated a difficult period in Q2 2020 following the onset of Covid-19, as lenders were selective in their deal and property type choices, according to the latest research from CBRE.

A temporary freeze in commercial real estate lending and transaction markets beginning in mid-March through early April, resulted in fewer loan closings in Q2 2020. The CBRE Lending Momentum Index, which tracks the pace of commercial loan closings in the U.S., reached a value of 194 in June—a 29.3% decrease from its Q1 2020 close and down 20.5% from a year ago.

While broad liquidity was restored to the market later in the quarter and multifamily agency and certain industrial deals were bright spots, other sectors suffered from selectivity and the withdrawal of CMBS and alternative sources of capital.

“While we have seen a steady improvement in the number of loan applications over the past five weeks, we anticipate that commercial mortgage markets will remain muted over the near-term, especially for retail and hospitality properties, as well as value-added deals, which face the greatest underwriting challenges. Underwriting will likely remain conservative due to current economic conditions and environmental challenges due to the pandemic,” said Brian Stoffers, Global President of Debt & Structured Finance for Capital Markets at CBRE.

Loan credit stress quickly emerged in the retail and hotel sectors, pushing the overall CMBS delinquency rate up to 6.37% in June from 1.24% in March. June delinquencies varied substantially by property type with hotel (22.82%) and retail (17.68%) leading, followed by office (2.43%), industrial (1.21%) and multifamily (0.6%).

CBRE’s lender survey indicates that banks overall captured over 70% of loan originations in Q2 2020—more than double recent averages—driven by regional bank activity. With overall lending volumes down, banks were a source of refinance capital across all major property types and also funded several bridge and construction loans.

Life companies accounted for the second largest share of loan originations at 23%, down slightly from the Q2 2019 level. Most life company originations were conservative, with LTVs of 60% or less.

CMBS conduit lenders struggled to rebuild deal pipelines following the market disruption and the sharp rise in spreads during March and April. In addition, loan underwriting remains challenging. Industry-wide CMBS issuance was close to $30 billion in H1 2020, the slowest pace since 2016.

Alternative lenders (includes debt funds, mortgage REITs, finance companies) were largely absent from loan fundings in Q2 2020, with several experiencing liquidity issues and unable to close new business.

Loan underwriting measures changed modestly in Q2 2020. The average loan-to-value (LTV) ratio fell, while the average debt service coverage ratio (DSCR) and debt yield rose. The average amortization rate—the percentage of origination balances that pay down over the loan term—fell in in Q2 2020, reflecting a higher percentage of loans carrying either partial-or full-term interest only (67.3%) than the 59.6% of a year ago.

“The changes in loan underwriting measures reflected the underlying property type composition. While both multifamily and commercial underwriting was more conservative, the overall results were affected by a higher proportion of multifamily loans, which tend to be underwritten slightly more aggressively than commercial ones,” added Mr. Stoffers.

About CBRE Group, Inc.

CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2019 revenue). The company has more than 100,000 employees (excluding affiliates) and serves real estate investors and occupiers through more than 530 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at