An approaching wave of commercial real estate loans this year is expected to boost appraisal activity.
The wall of CRE loans approaches amid declining values of some types of commercial properties over the past year. This has been largely driven by the rapid succession of interest-rate hikes, tighter lending restrictions and pandemic-related trends impacting the real estate industry.
When the loans come due, borrowers will either need to refinance, sell their properties, or worst-case scenario, default on their loans which have raised concerns among banking authorities.
To avoid an onslaught of defaults, banking regulators have asked lenders to consider working “prudently and constructively” with credit-worthy CRE borrowers facing financial stress, according to a Reuters article.
Whichever option that borrowers choose to meet their loan obligations, lenders will require reports to establish their loan value and potential conditions impacting them.
For example, property condition assessments may be required to determine if there have been any changes to a property, such as environmental conditions, zoning regulations, maintenance levels and other factors.
In all CRE foreclosures, lenders will require a new Phase 1 Environmental Site Assessment (ESA) of the property. Lenders also will seek appraisal services to help determine the risk of loans that may default.
While there has only been a trickle of CRE deals in the past two quarters compared to the same periods in recent years, lenders’ business activity is poised to pick up as the coming influx of loan maturities occur this quarter, during the following quarter, or both.
According to the Mortgage Banking Association, a historic high of $728 billion in CRE loans will mature in 2023, and an estimated $1.5 trillion of these loans will mature over the next three years. This amount includes loans that are interest only. The trade group also said that lenders are holding an estimated $4.47 trillion in income-producing CRE loans.
Banks are expected to extend some loans through refinancing deals, especially for well-performing properties. But it will be difficult for owners to put in additional equity to make refinancing deals work for properties that lost significant value and face challenges to rebound in the foreseeable future.
Life insurance companies, agencies and private lenders are expected to fill some, but not all, of the gaps left by banks. Some private lenders are charging between 9 percent and 13 percent on CRE loans.
Prior to the retrenching of the CRE market, commercial real estate activity was on a tear, bolstered by low interest rates, and coupled with strong occupier and investor demand. This created the need for more valuation and assessment services to meet CRE’s escalating growth.
Uncertainty Over CRE’s Direction Impacts Price Discovery of Assets
In the meantime, CRE activity continues to be hampered by growing uncertainty over the market’s direction. This condition has created a lack of price discovery – the act of determining a common price for an asset – on deals. As a result, the market is in a holding pattern.
Why the uncertainty? While the Fed pressed the pause button on interest-rate increases in June, it signaled that the central bank may not be finished with its job of boosting rates to whip inflation, which has declined in recent months but is still well above the Fed’s 2 percent growth target.
In its post-meeting statement, the Fed said there was still a need to “assess additional information and its implications for monetary policy”, indicating the resumption of interest-rate increases – a message the market didn’t want to hear.
Although the labor market cooled a bit in June with the addition of 209,000 jobs, it still shows enough strong job growth to convince the Fed that its battle with inflation is not over. Additionally, the upward movement of 10-year Treasury yields further increased the odds of another interest-rate hike when the Fed meets later this month.
So until a clearer picture of the Fed’s monetary stance emerges, most owners and investors will opt to adopt a wait-and-see approach, despite attractive pricing for some of those properties.
Lenders Need Appraisal Firms Offering Diverse and Efficient Services
Lenders will need to engage with an appraisal firm that offers highly diversified services, advanced technology for quick and efficient reporting, and leading regional and market expertise to meet the demands of an evolving economic environment, whether it’s expanding or contracting.
BBG, the country’s largest independent real estate services firm, offers the talent, technology and geographic reach that lenders and others need to achieve their goals.