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Debt & Equity

CRE lender survey predicts market peak is around the corner

May 4 RELA graph

The share of multifamily and commercial property lenders that expects to increase the volume of their lending over the next year declined to 42 percent, according to the Spring 2015 RELA–Chandan Survey of Commercial Real Estate Lender Sentiment, down from 47 percent in the Fall 2014 survey.

Lenders are most reserved in their expectations for the hotel sector, where a significant minority of survey participants now expects an outright decline in their institution’s new commitments in late 2015 and early 2016.

In contrast with the general trend of more reserved expectations for volume growth, the outlook for multifamily lending volume improved in the Spring 2015 survey.

In comments from market participants, several banks, life companies, and conduit lenders anticipate that caps on agency volume will constrain new multifamily lending by Fannie Mae and Freddie Mac
in spite of changes in FHFA exclusion criteria, driving demand for non-agency financing of apartments.

In a pair of special questions about the market cycle, a majority of lenders expects that new lending volume will reach its cyclical peak during 2016 or 2017, coinciding with slower growth in sale transaction and refinancing activity.

Just 17 percent of respondents believe that lending will peak in 2018 or later.

Asked about the timing of an inflexion in lending standards, the survey results suggest that tightening will begin with some lag on volume.

A significant minority of lenders forecasts that standards will ease or remain unchanged until at least into 2018.

As compared to last Fall, lenders report a faded appetite for greater risk-taking even though standards will continue easing under competitive pressure.

Across all property and loan characteristics, the net share of lenders projecting an increasing risk appetite fell to four percent in the Spring 2015 survey, down
from 19 percent in the Fall 2014 report.

The responses suggest that loan-to-value ratios at origination will trend higher over the next year.

Only a small net share of lenders expects a stronger risk appetite for property quality, location, or sponsorship.

Survey responses suggest that lenders are poised to pull back on debt service coverage and debt yield, which may reflect their updated expectations for rate tightening over the next year.

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