Mortgage Giants Are Pulling Back—How Worried Should You Be About the Market?


Commercial real estate lending is drying up as the market continues to face a period of turbulence. 

Two of the biggest mortgage real estate investment trust (REIT) companies, Blackstone Mortgage Trust and KKR Real Estate Finance Trust, have halted loans to new borrowers, according to The Wall Street Journal. Meanwhile, Starwood Property Trust has decreased its lending activity in recent quarters. 

These lending giants seem to be taking a more conservative approach amid a rise in delinquencies and skyrocketing interest rate concerns. All three are shoring up their reserves in case of losses, which is also putting pressure on their finances. 

Why Big Mortgage REITs Have Stopped Lending 

The commercial real estate market has had a rough few years. While not as high as during the lockdowns of 2020, delinquency rates have increased in the past year. And ratings agencies have downgraded some regional lenders with high commercial real estate exposure.

Commercial mortgage lending, in general, has slowed, with the CBRE Lending Momentum Index falling by 52.2% year over year in the second quarter. Banks remain one of the biggest lenders, usually for new construction and refinancing, while alternative lenders such as REITs have constrained their lending over the past year.

In addition, soaring mortgage rates have made it harder for borrowers to refinance, as landlords face pressure from increased vacancies. 

At the end of the first half of 2023, the office vacancy rate reached a high of 13.1%, according to the National Association of Realtors. With more companies embracing the hybrid work model, there has been less demand for space, leaving some landlords hurting financially. This financing difficulty has led to slowing liquidity in the commercial and multifamily real estate market. 

“Higher and volatile interest rates, uncertainty about property values, and questions about some property fundamentals have led to an impasse in property sales and mortgage originations activity this year,” said Jamie Woodwell, head of commercial real estate research at the Mortgage Bankers Association, in a statement.

It seems mortgage REITs share that same concern. In a recent earnings call, Starwood chief executive Barry Sternlicht voiced unease about the fissures he was seeing in the real estate market and the broader economy, saying: “I’m not as sanguine [as others] that we’re going to avoid a recession. So we have chosen to be fairly conservative here.”

Will This Impact the Residential Market? 

For 2023, mortgage lending for commercial and multifamily properties is expected to fall 38% from 2022 to $504 billion, according to the Mortgage Bankers Association.

Multifamily properties are faring slightly better than commercial real estate, which is good news for the overall market. Although rental growth has slowed, the vacancy rate in the retail sector remains unchanged at 4%, which is good news for landlords and lenders. Still, the vacancy rate has increased slightly compared to last year, largely due to an oversupply of multifamily construction.

A continued lack of liquidity for multifamily projects could impact future supply. That lack of supply could potentially put continued pressure on pricing issues that spill over into the residential market. And while what’s happening in the commercial lending space and residential space is slightly different, concerns about interest rates have hit both sectors hard.

Still, Woodwell is optimistic that interest rates will ease in the next year or so, bringing much-needed relief to financing costs and property values. But if interest rates don’t decline, it would suppress activity, he said, adding, “The uncertainty about future interest rate paths is a contributing factor to today’s slowdown.” 

The Bottom Line 

While there are cracks in the commercial real estate market, it has yet to spill over into the residential space. Still, with uncertainty around raising interest rates and demand-supply mismatch in multifamily properties, the housing market could continue to be in for a bumpy ride for a few more quarters.  

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.



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