How Inflation, Rising Interest Rates and More Are Affecting Bank Lending in 2022 – Trade Observer

The bank lending environment, like the rest of the commercial real estate world, has faced many factors over the past two and a half years that have turned it upside down – from the pandemic to global inflation to various sectors over- or under-performing compared to their pre-pandemic numbers. Partner Insights spoke to Chris Niederpruem, Managing Director and Group Head of Property Finance at CIT, a division of First Citizens Bank, to learn more about the current state of bank lending.

Commercial Observer: We talked last fall about the bank lending environment for commercial real estate. What are the most important changes in this environment since?

Managing Director and Group Head of Real Estate Finance Chris Niederpruem of CIT

Chris Niederpruem: The most obvious change from last fall is the interest rate environment, which has changed the way commercial real estate investors and lenders think about underwriting. Debt is an important part of how investors make trading decisions. With higher interest rates, the likelihood of further rate hikes and the looming backdrop of a potential recession, the landscape is significantly different from what we experienced 6-6-12 months ago. The cost of debt is higher, so in many cases the leverage on commercial real estate transactions is reduced. The piece of the puzzle that remains to be determined is the impact this will have on valuations. This rate environment is not something we have seen for a very long time.

What impact has this had on this segment of the industry’s competitiveness?

The competitive landscape has certainly changed. Last year, as we emerged from the worst of the pandemic, there was a lot of pent-up demand to invest and lend in commercial real estate, and a lot of capital had been raised. Last year was therefore a record year for the volume of transactions in the industry and it was extremely competitive. Now, with the change in the interest rate environment and some of the other changes in the capital markets, there has been less trading volume. Buyers and sellers move much slower to transact. Some lenders pulled out or slowed their appetite for loans, creating opportunities for other lenders and investors. It’s still a competitive sector, but a little more measured than in 2021.

How has rising inflation affected the commercial real estate lending landscape?

Rising material and labor costs impacted construction. Also, when looking at a property’s future cash flow, you need to factor in higher expenses and then try to balance them against income or rent growth. What growth remains in some of the markets that have seen historic rental growth? For example, some of the Southeast markets have seen double-digit growth in multi-family apartment rents over the past year. How much growth is left versus the inflationary impact on the spending side? These are things that many lenders and investors have been forced to think about thoroughly.

Besides inflation, are there any other national or global events affecting the lending landscape these days?

There have been upheavals in capital markets, including uncertainty surrounding international business, interest rate hikes and potential recessions to come. These things have shaken up capital markets, raising challenges for lenders who fund themselves this way. It changed their ability and appetite to lend like they did in 2019 and 2021. (I’ll skip 2020 for obvious reasons.) So it’s a challenge for some lenders and an opportunity for other lenders.

Has there been a shift in demand for certain lending products in all of this?

Yes. The most obvious is that, in many cases, investors are looking for longer-term, more fixed-rate loan products than in the past. This is a common change when you have such a rapidly rising interest rate environment. That’s what we’ve seen, and I think most lenders have seen more demand for this type of product.

Overall, how would you describe the state of the commercial real estate loan market for lenders today?

I think it’s a responsible environment. Lenders maintained underwriting standards. Leverage hasn’t gone crazy. The structures have not become too loose. There is still a lot of equity in the deals, now probably even more than last year. The floodgates were apparently open in 2021, and most lenders had a banner year. In 2022, it’s been a bit more of a measured environment. But there is a great opportunity for lenders who are still able to be active in the market. Some lenders face headwinds in how they capitalize. Other lenders, however, find excellent opportunities to do business with strong sponsors, large real estate, and very conservative debt and loan structures.

See more articles on the future of CRE Banking here.

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