Important points
A version of this article first appeared in the CNBC Property Play newsletter with Diana Orrick. Property Play covers new and evolving opportunities for real estate investors, from individuals to venture capitalists, private equity funds, family offices, institutional investors and large publicly traded companies. Sign up to receive future editions directly to your inbox. Commercial real estate is finally flush with cash, with lending activity reaching record levels. That’s the finding of a new credit index provided exclusively to CNBC’s Property Play by JLL, a global commercial real estate services and investment management company. JLL tracks the number of lenders quoting and average closing loan-to-value (LTV) rates going back to 2019. Global credit activity and the overall competitiveness of loan terms among lenders reached a record high in April, driven by both strong refinance demand and large loans, according to JLL. A near-record number of individual lenders were active across all sources of capital, from banks to private investors to family offices. As a result, LTV rates are increasing. In addition to increased demand for banks, credit fund activity has increased over the past five years, with private fund (LP) investors putting money into credit vehicles. Government agencies are also actively working on multifamily real estate, and insurance companies are also expanding their real estate efforts. “This is because these groups can earn higher spreads by investing in real estate compared to others,” said Lauro Ferroni, head of Americas capital markets research at JLL. “For them, it could be more lucrative. That’s No. 1. No. 2 is that they want to diversify their allocations into different buckets, especially in different economic cycles.” Data centers are driving a lot of the activity as large-scale construction boosts not just the real estate industry but the economy as a whole. It is widely driven by artificial intelligence. “When it comes to other real estate sectors, it’s just the fundamentals of their performance that end up making them relatively attractive to both buyers and lenders,” Ferroni said. He pointed to the fact that real estate values have been repricing since interest rates started rising in early 2022. In contrast to the S&P 500, which is near all-time highs, commercial real estate is at an attractive entry point, he said. In other words, there are bargains to be had. According to JLL, refinancing is also a major factor in creditworthiness. Commercial property owners are reluctant to sell their properties at lower prices as debt matures, increasing demand for refinancing. Some people are under economic pressure and are simply selling off, unsure that interest rates will ease and values will rise. In general, refinancing is increasingly preferred. The sudden credit boom has created a large competitive disconnect between credit markets and normal investment sales bidding activity. The latter remains below 2021 levels, according to JLL’s quarterly Global Bid Intensity Index. Competition among CRE buyers is increasing, but not as strongly as in credit. Although there was some seasonal slowdown at the start of the year, investors remain attracted to commercial real estate’s high relative value and diversity. This is despite the economic and general geopolitical uncertainty brought about by the war with Iran. However, while a gap still exists between buyer and seller expectations, the global bid-ask spread has narrowed significantly since the market bottom in 2023. JLL’s report notes that the second half of this year is paving the way for a more predictable trading environment. There is also increasing differentiation between the demands of specific sectors. “What’s notable over the past three months is that bidding fundamentals continue to strengthen in the industrial and logistics sector, where vacancy rates, particularly in large warehouses, have fallen markedly as leasing activity picks up,” Ferroni said. On the other hand, demand for multifamily housing is weakening in terms of bidding competitiveness. This is because despite a strong job market, recent oversupply has further constrained rent growth.
