< Back to Insights
Category: Capital Markets Tags: Capital Markets, Debt, Inflation, lending

Click Here to Access Full PDF

What We Learned in the First Half of the Year

Business operations have recovered from the pandemic’s interruption in early 2020 but, the financial impact from the pandemic is still present. Overall, the great resignation, inflation, rising interest rates, supply chain issues, and increased buyer demands have caused repercussions in the financial sector, and lenders have begun to proceed with caution.


Record-Breaking Borrowing & Lending Activities

According to a study completed by the Mortgage Bankers Association (MBA), real estate-backed commercial lending showed a sharp increase at the end of 2021. In its latest forecast, total commercial and multifamily mortgage will hold steady in 2022, decreasing original expectations from $1 trillion to $895 billion. This is only slightly higher than the $891 billion in lending that occurred in 2021.


Commercial real estate lending volumes are closely tied to the values of underlying properties, and last year they rose by more than 20 percent. Part of the excessive growth was fueled by rebounding property fundamentals, strong valuations, ample supply of debt and equity capital, and low interest rates, drawing investors from all walks of life to the space. This resulted in commercial and multifamily borrowing to easily outpace previous periods.


The Unknowns

Following where inflation will go is difficult to estimate. Despite the Federal Reserve stating that the high inflation is temporary, many acknowledge that the period might run longer than initially expected. According to Oxford Economics, the sticky supply-driven inflation will continue well into the second half of 2022. The annual core inflation rate is 6.2 percent for the 12 months ending April 2022 and after rising 6.5 percent previously, the U.S. Labor Department reported in May.


Another impact of inflation would be that of higher interest rates. The Fed has indicated its intention to increase rates. It’s also important to consider the macroeconomic events like supply chain disruptions and businesses trying to recover losses incurred during the pandemic. If cap rates increase, there is going to be a need to increase revenue growth to offset the value drop. Continued increases in property income and stability in the ways investors value those incomes should support solid demand for mortgage capital, even in the face of rising interest rates and record-level inflation.


The National Emergency Declaration was set to expire on March 1st, 2022, however, President Biden announced that it would extend beyond that date. It is currently set to expire in mid-July 2022. With this looming in the future, banks may be forced to reassess both existing borrowers and prospects.


Well into late 2022, deferment of payments will continue, but if additional liquidity is necessary, banks may no longer be willing to provide loans without strong paths to profitable sales and a positive long-term outlook. Moving forward, banks will be taking a much more conservative approach, and lenders may be less willing to fund new borrowing requests given the inflationary environment. Borrowers are also taking advantage of alternative financing options, many of which are non-recourse and offer more pre-payment flexibility.


Although banks are somewhat more cautious in the lending process, they are still actively originating loans. As the market continues to move and buyers seek alternative ways to finance their assets, mortgage brokers will play an integral role in effectively adding value to the process. Some alternative financing options income family office funds, offshore funds, debt funds, and private money funds.


The Hedge Against Inflations

There is plentiful capital available from a competitive standpoint in the commercial real estate market as investors flood to real estate as an inflation hedge. As previously experienced, real estate generally outperforms stocks and gold through inflationary periods. It is expected that there will be more money competing for the financing, and lending will depend on the property type.


For example, multifamily is popular because it is built into the concept of commercial real estate being a hedge against inflation. Rising rents provide the escape value property owners and managers need to meet higher prices. Other retail properties offer a hedge against inflation, such as dollar stores, drugstores, and grocery stores, all of which provide necessities for everyday living.


Recent Articles

Recent Media & Thought Leadership