Commercial Real Estate Lending Fell for First Time in 2 Years Last Month

• Commercial real estate lending fell for the first time in two years last month amid tight credit conditions
• Debt on commercial property fell to $5.44 trillion in June, driven by a large drop in multifamily lending. 
• That trend will continue through the second-half of 2023, according to Capital Economics.

Lending in the commercial real estate shrank for the first time since 2021, a sign that higher mortgage rates and tighter credit conditions are weighing on the sector. 

Outstanding commercial real estate debt dropped to $5.44 trillion in June, marking the first drop in commercial real estate lending recorded in two years, according to Refinitiv data cited by Capital Economics. 

That’s largely due to the overall slowdown in lending on multifamily properties, with demand slumping as rates rise. Multifamily property debt fell by $21.6 billion last month, the research firm said.

Still, commercial property debt saw sluggish growth in June, increasing by just $7.4 billion last month. 

“CRE lending is likely to remain weak in the second half of 2023,” Capital Economics assistant property economist Charlie Cornes said on Monday, pointing to rising delinquencies on US commercial mortgage-backed securities.

The delinquency rate for loans back commercial mortgage bonds rose for the second-straight month to 1.91% in June. 

Banks began to pull back on lending in the aftermath of failures of several regional lenders earlier this year. In April, credit availability for small businesses saw its largest drop in two decades, per Morgan Stanley data. 

That could spell trouble for the commercial real estate sector, which has struggled with anemic demand and has around $1.5 trillion in debt approaching maturity in the next few years.

Those factors could lead to a rise in commercial mortgage defaults experts say, as property owners feel the pain of tighter financial conditions. Commercial real estate prices could plunge as much as 40% from their peak, Morgan Stanley previously estimated, which would mark an even more severe crash than what was seen in the 2008 financial crisis.