Almost every week Wall Street awaits news on “leading indicators” such as Housing Starts, Jobless Claims, S&P Index, Money Supply and Consumer Sentiment Index which will influence the decisions of not only Wall Street but also the government, investors and consumers. These leading indicators are measurable economic factors that change ahead of the overall economy and are used to predict what the future has in store for the economy. While other economic indicators such as Employment Figures, GDP, CPI and Retail Sales give us real time information on the current state of the economy, the leading indicators can give us either optimism or pessimism as to what the future may hold.
Similarly we are inundated with data and statistics related to Commercial Real Estate Lending. As I was reading a few industry publications over the weekend, I began to think specifically about the current state of lending and the direction we might be headed. Actual 3rd Quarter 2011 statistics as surveyed by Mortgage Bankers Association indicated that lending activity is on the rise but I was more interested in what “indicators” may lie within all the statistics to suggest that this improvement is a trend and not an anomaly.
The numbers are eye-popping – a 10% increase in the 3rd quarter over the 2nd quarter and a 98% higher than during the 3rd quarter of last year(1). But wait, percentages can be deceiving. Much like a major league baseball player dramatically improving his batting average over a month’s time, a 30% increase in average is a phenomenal story if the batter started at .300 but the same increase if the batter started at .200 would be considered the player’s job-saver. Sure lending activity has increased in 2011 but keep in mind that 2009 and 2010 provided us the lowest levels of commercial real estate lending in over a decade. Overall originations in the 3rd quarter of 2011 totaled $138 billion, almost double of the $70 billion originated in the 3rd quarter of 2010(1). It will take another double to get back on pace with the origination levels of 2005, 2006 and 2007. Moreover, the average loan size originated in the 3rd quarter of 2011 was $14.9 million which is more than 40% higher than the average in 2009 and 2010(1). Lending activity is still slanted toward the larger deals typically located on the coasts and institutional in nature. Origination volumes may be up significantly in terms of dollar amounts but that does not necessarily equate to a dramatic increase in the amount of new originations
As intermediaries that represent entrepreneurial owners, investors and developers, we have been in the trenches over the last several years and are acutely aware of the challenges that face borrowers in the $1 million to $15 million range. These statistics look great on the surface but we are still a long way from where we all want to be. What did I find among this information indicating a positive trend and optimism for 2012 and beyond?
- Total level of mortgage debt outstanding increased by 0.1% in the second quarter of 2011 representing the first time in a year and a half that new loan originations outpaced the paying off and paying down of existing loans(2).
- Leading lenders indicated that almost 60% of their 2011 transactions were new originations and 40% of 2011 transactions were to new clients representing a significant change in lending activity over past years which mostly entailed refinancing activity for repeat clients(2).
- Multifamily was the only game in town over the last several years but other property types are now gaining favor. Compared to 3rd quarter of 2010, Hotels are up 406%, Retail properties are up 164% and office properties are up 103%(1) & (3) .
- GSEs dominated new originations over the last several years but we have new signs of life with significant increases in originations in the 3rd quarter of 2011 compared to last year’s 3rd quarter from commercial banks (433%), conduits (169%), life companies (61%)(1) & (3).
Despite the challenges of the last few years it has been hard not to think that CRE Lending will improve simply because it could not get much worse than the historical lows of 2009 and 2010. However, we are now seeing more and more positive indicators to support that blind optimism. Here’s to the future.
(1) Source: Q32011 Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations
(2) Source: Commercial Property Executive
(3) Yes I know said Percentages can be deceiving but go with me here.