The commercial real estate market is frozen as soaring bond yields bring lending to a halt
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- Commercial real estate lending has ground to a near-halt as bond yields soar.
- The volume of loans outstanding rose less than 1% last quarter, the smallest increase seen since 2014.
- As borrowing costs surge and refinancing risks mount, lenders are shying away from the space.
Commercial real estate lending has ground nearly to a halt as bond yields soar and lenders pull back.
Commercial real estate lending slumped to its lowest level in nearly a decade in the middle of this year, according to Trepp data cited by the Wall Street Journal. Outstanding debt in the sector held by banks rose by less than 1% over the second quarter, the lowest rise in lending seen since 2014.
Meanwhile, just $28.2 billion of loans were converted into commercial mortgage-backed securities this year, Trepp data shows, the smallest amount since 2011.
Those changes reflect mounting fears in the commercial property market as bond yields surge. Rates on commercial mortgages are influenced by Treasury yields, which hit a 16-year-high of 5% in recent weeks. The 10-year Treasury yield was around 4.8% on Wednesday.
Higher bond yields are expected to raise borrowing costs for commercial real estate owners while pushing down property prices, experts say. Even if the 10-year yield eases to around 3.75% in 2024, office prices could plunge by around 40% peak-to-trough, according to analysis from Capital Economics.
Higher rates could also bring on a wave distress. There's around $1.5 trillion of commercial mortgage debt set to mature over the coming years. Though the delinquency rate on commercial real estate loans remains low relative to pandemic levels, it's already risen sharply over the past year, according to Federal Reserve data.
Federal Reserve
Markets are expecting bond yields to remain elevated in the medium term as the Fed maintains a higher-for-longer view of interest rates. Concerns over the US debt balance could also buoy yields as s0-called bond vigilantes and investors concerned about the soaring US deficit shun US government bonds.