CRE lending expected to hit record high in 2020, despite challenges

Bolstered by a high demand by both lenders and borrowers, 2020's commercial and multifamily loan volume is anticipated to shoot well past last year's record total but adapting to the LIBOR and CECL shifts will provide challenges, according to the Mortgage Bankers Association.

About 64% of commercial and multifamily firms anticipate growth in overall loan originations this year. Nearly 16% forecast that growth to be above 5% while 42% expect their own firm's origination volume to grow over 5% in 2020, according to the MBA's Commercial Real Estate Finance Outlook Survey.

Even with the frothy market expectations, market leaders foresee more debt available than deals looking for it. Other speed bumps include the shift from LIBOR and CECL adoption.

"LIBOR's more straightforward in what the challenges are but more complex in the solutions. This rate that's been foundational to so much of the investment world is slated to go away and is a big transition issue. What's going to replace it? How do we transition to it? What are the elements of the replacement rate? A lot has to be done in not a lot of time," Jamie Woodwell, MBA's vice president commercial real estate research, said in an interview.

LIBOR is on track to be replaced the end of 2021. For CECL, it's a matter of navigating the change in accounting rules and how loans are represented on lenders' books.

"Lenders will need to anticipate up front what potential losses for that loan is going to be over its entire lifetime and book those upfront even though the loan shows no signs of experiencing losses," he continued. "With that comes a lot of operational work; developing the models, getting the right data and calculating what the potential losses would be, developing governance and accounting processes around that. And that's before getting to the question of what are the impacts? Will that increase the capital you need to hold or change the asset liability mix, and what are the implications for lending on that?"

Every single CRE originator surveyed reported lenders had "strong" or "very strong" appetites for new loans in 2019, and expect the same thing for 2020. Nearly 91% of borrowers expressed a strong demand for loans in 2019 and 80% indicated that they will be fervently seeking financing in 2020.

"Buoyed by low interest rates, strong property markets and rising property values, commercial and multifamily mortgage banking firms expect a solid year in 2020," Woodwell said in a press release. "Most anticipate strong appetites from lenders and borrowers and expect overall levels of mortgage borrowing and lending to increase.

Commercial and multifamily originations are estimated to have closed 2019 at an all-time high of $628 billion and are expected to reach an estimated $683 billion in 2020, a 9% increase.