The $5.5 trillion U.S. commercial mortgage market in a nutshell...
DEBT FUNDS AND MORTGAGE REITS have meaningfully increased market share in recent years, backfilling debt that was historically covered by banks. 6% of the market.
CMBS accounts for 9% of the market, but its market share continues to fall as CMBS originations regularly fall short of the 2006-07 peak origination years.
INSURANCE COMPANIES have increased market share (controlling 12% of the commercial mortgage market) in recent years as they've migrated to more floating rate debt, while continuing to maintain relative dominance in the high-quality, fixed rate space.
AGENCIES AND GSES have ballooned in recent years, along with multifamily collateral values. Soley focused on debt secured by multifamily, agencies control 17% of the market.
BANKS represent 50% of the market and have historically dominated the construction lending space (15-20% of bank loans), primarily because these loans generate relatively strong fees, are relationship-oriented, and their short terms match well with bank liabilities. 20-25% of bank loans are generally tied to multifamily projects, with the balance secured by office, industrial, and retail collateral. Notably, there's a meaningful and growing difference between big banks and small banks in terms of appetite for commercial mortgage lending.
BIG BANKS HAVE BEEN HANDCUFFED: Real estate lending has become a lot less important to big banks over the last eight years, perhaps stemming from post-GFC financial regulation. Construction loans, multifamily, and non-residential mortgage holdings grew by less than 3% per year.
CRE DEPENDS ON SMALL BANKS: Unlike large bank lending, small bank CRE lending grew by 10% per year over the last eight years, led by growth in construction (+12%/yr) and multifamily loans (+15%/yr).
BANKS ARE DOWNSHIFTING: The Fed recently released bank data from April (after SVB's failure). YoY loan growth fell by 20% between February and April. Clearly, banks turned a corner in March, and loan growth will decelerate even more in the coming months. Nearly 70% of bank loan officers report that credit standards tightened in April (approaching the Covid peaks of 80%), which suggests the real estate market is headed for a meaningful deleveraging.
The biggest deleveraging in history occurred in the four years immediately following the GFC, when lenders pulled back on $300 billion (15% of the mortgage market), leading to 40% peak-to-trough property value declines. However, the post-GFC deleveraging was driven by very different factors: A broad re-pricing of risk after the discovery of credit problems vs. interest rate risk.
Will credit quality hold up this time? Who will backfill the void left by small banks if "too big to fail" regulations hit local/regional banking?
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