Key Points
A version of this article first appeared in the CNBC Property Play newsletter with Diana Olick. Property Play covers new and evolving opportunities for the real estate investor, from individuals to venture capitalists, private equity funds, family offices, institutional investors and large public companies. Sign up to receive future editions, straight to your inbox. Commercial real estate is finally flush with cash, seeing record levels of lending activity. That’s the finding of a new credit index provided exclusively to CNBC’s Property Play by JLL, the global commercial real estate services and investment management firm. JLL tracks the number of lenders quoting and the average winning loan-to-value, or LTV, rates going back to 2019. Global credit activity among lenders as well as overall competitiveness of loan terms reached an all-time high in April, driven by both strong refinance demand and large loan placements, JLL found. There was a near-record number of distinct lenders active across all capital sources, from banks to private investors to family offices. As a result, LTV rates are rising. In addition to growing bank appetite, there has been a lot of credit fund activity over the past five years, where investors in private funds, or LPs, have put money into credit vehicles. Government agencies have also been more active in multifamily real estate, and insurance companies are now expanding their real estate exposure. “It’s because those groups can earn a bigger spread by investing in real estate versus something else,” said Lauro Ferroni, JLL’s head of capital markets research for the Americas. “It can be more lucrative for them. That’s No. 1. No. 2 is just that they want to diversify their allocations across different buckets, especially in different economic cycles.” Data centers are driving much of the activity as the massive build-out fuels the real estate industry as well as the broader economy. That is driven broadly by artificial intelligence. “When it comes to the other property sectors, it’s really just their performance fundamentals that are making it relatively attractive for both buyers and also lenders as a result,” Ferroni said. He pointed to the fact that real estate values have repriced since interest rates started to go up in early 2022. As opposed to the S & P 500, which is close to all-time highs, commercial real estate is at an attractive entry point, he said. In other words, there are bargains to be had. Refinancing is also driving much of the credit appeal, according to JLL. Commercial real estate owners aren’t excited to sell their properties at lower values as their debt matures, so demand for refinancing is rising. There are those who, under financial pressure and unconvinced that interest rates will ease and values will rise, are just selling out. In general, refinancing is increasingly preferred. The sudden boom in credit is creating a wider divergence in competitiveness between credit markets and regular investment sales bidding activity. The latter is still below 2021 levels, according to JLL’s quarterly Global Bid Intensity Index. Competition among CRE buyers is growing, but far less dynamically than credit. There was some seasonal softening to start the year, but investors are still drawn to the strong relative value and diversity of commercial real estate. That’s despite the uncertainty in the broader economy and geopolitics brought on by the war with Iran. There is, however, still a gap between buyer and seller expectations, but the global bid-ask spread has narrowed significantly since the market bottom in 2023. JLL’s report notes that it is paving the way for a more predictable transaction environment in the second half of this year. There has also been growing differentiation among specific sector demand. “What’s been notable over the past three months is the continued strengthening of bidding fundamentals in the industrial and logistics sector. As leasing activity has picked up there, the vacancy rates of especially large warehouses has come down quite notably,” said Ferroni. Meanwhile multifamily demand, as measured by bid competitiveness, is weakening. That is due to a recent oversupply that has kept rent growth more depressed, despite a strong job market.
