What Lies Ahead for the Lending Industry in 2023?

Industry Trends

The latest Lightbox report surveys the commercial real estate landscape—and offers valuable insights

As part of an ongoing effort to help commercial real estate industry professionals work more efficiently, LightBox Collateral 360® launched an integration with the Baker Hill NextGen® loan origination platform to streamline the lending process. 

In an effort to share what we’re seeing in the market, LightBox also publishes regular content surrounding commercial real estate trends. A recent report, Early 2023 Barometers: Resetting Market Expectations, looks at challenges and opportunities across the spectrum of commercial real estate as the Fed seeks to tame inflation with interest rate increases.

   A property valuation reset is coming: The key to boosting market momentum is more clarity on where the pricing reset will land. Until that happens, a bid-ask spread will continue to slow investment activity

   Uncertainty remains pervasive: Investors are looking for more certainty in the potential movement of interest rates, along with pricing levels and the long-term economic outlook

   All eyes on are on the second half of 2023: Many experts predict stronger loan origination and transaction activity in the second half than in the first half as the market adjusts to the new environment

  The industry is alert for distress: As more than $1 trillion in loans come due in 2023-2025, the market is carefully watching for distress, because of its impact on market stability

   Concerns about a recession are easing, but still remain: There is much debate about whether a recession will occur. Many experts predict a mild recession beginning in 2024, while others say there will be no recession at all

  Multifamily rent growth to stabilize from record numbers: Double-digit growth is no longer sustainable, but five to seven percent growth is still a strong indicator and is a realistic projection

According to the report, “The country’s largest commercial lenders began to retreat from commercial property loan originations in the third quarter of 2022, as rising interest rates increased the cost of capital and uncertainty over property valuations accelerated. By year-end, the Mortgage Bankers Association (MBA) reported that commercial and multifamily mortgage loan originations were a dramatic 54% lower in the fourth quarter of 2022 compared to a year ago and down 23% from the third quarter.”

Commercial property listings and transactions declined in late 2022 as a bid-ask gap developed between buyers and sellers, and higher capital costs contracted the buyer pool. In the fourth quarter, the volume of property listings on the LightBox RCM platform declined by almost 50 percent year-over-year, though only six percent down compared to 4Q19, a more typical quarter.

MSCI’s year-end transactions report says commercial property dealmaking of $138.9 billion was 62 percent below 4Q21. Declines were greater than 50 percent for all four major asset classes. The sharpest quarterly decline—67 percent—was in multifamily sales, while office saw a 65 percent quarterly drop in investment activity.

While there is still long-term optimism and available capital, the path forward will require perseverance and fortitude. One key factor in boosting investment sales activity is the complex process of working through buyer and seller expectations and achieving new property valuations. Until the bid-ask spread narrows and clarity on pricing takes shape, transactions will likely be dominated by cash buyers and opportunistic investors. In a February forecast, the MBA estimated that total commercial and multifamily mortgage borrowing and lending should fall to $684 billion this year, a significant 15 percent decline from an expected 2022 total of $804 billion—more pessimistic than a January forecast of a five percent decline for 2023 lending activity.

Loan maturities and the potential for distress will also be dominant forces driving lending and valuation decisions over the next 12 to 18 months. This, along with added uncertainty about a recession, mean that flexibility, discipline, and thorough due diligence will generate the best outcomes.

You can access the full report here.

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