Market Data

Debt Capital Remains Available Despite Market Changes

Despite rising interest rates and increasing spreads, debt capital remains available and in demand for commercial real estate. While institutional lending was up significantly as of second-quarter 1999 and all institutional lenders have been active, some interesting changes in market share have occurred over the last 18 months. Here's an overview of what's happening in the market.

Who's Lending?
Outstanding commercial mortgages for all property types except multifamily totaled about $1 trillion in second-quarter 1999, according to the Federal Reserve Flow of Funds Z.1 report, which gives a comprehensive overview of the U.S. commercial real estate debt market. This figure represents an almost 3 percent increase over first-quarter 1999 totals.

Overall, the dollar volume of outstanding commercial mortgages is almost 20 percent greater than at the end of 1997 and 6.6 percent greater than at year-end 1998. Lenders continue to be comfortable enough with the state of property markets to increase lending production.

No private-sector lenders have experienced a decline. Not surprisingly, commercial mortgage-backed securities issuers are leading the charge to increase production levels and were up 5 percent. However, finance companies and private pension funds closely followed, boosting outstanding loans by 4.9 percent and 4 percent, respectively. A surprise to some observers has been savings and loans' increase in lending, which jumped 3.1 percent. The perception that the thrift industry has withered away has not proved true.

Other lenders that have increased outstanding commercial mortgages are commercial banks, which rose 2.8 percent, and life insurance companies, which were up 2.5 percent.

The amount of real estate investment trust debt assets, which increased by 6.4 percent in first-quarter 1999, remained unchanged. However, REIT liabilities decreased in the second quarter by 3.9 percent after increasing by 6.9 percent in the first quarter. It is not clear why this shift occurred, but REITs may be trying to rein in their use of debt capital, which was their first alternative when the equity markets became inhospitable to them in 1998. REIT mortgage liabilities at midyear 1999 were 57 percent higher than they were at year-end 1997, but only 2.7 percent higher than at year-end 1998.

In terms of volume, commercial banks are the 800-pound gorillas of the debt market, with $482.1 billion in assets, which is nearly half the market — and more than twice the size of lenders in the next tier. Commercial mortgage-backed securities issuers and life insurance companies comprise the next-largest segments with $179.2 billion and $173.1 billion in assets, respectively.

While most market observers are aware of the increase in CMBS issuers' market share, not everyone realizes that this has come largely at the expense of commercial banks and life insurance companies. Both have lost about 2 percent market share since year-end 1997. Because of anomalies in CMBS issuance patterns in late 1999, it is not apparent whether the market share loss will hold as a trend, but it bears watching. If it is a trend, it will show the continuing change of the real estate industry to the public market as the provider of capital.

Multifamily Lending
While displaying a similar upward trend, the multifamily debt market shows some differences in composition from the debt market for other property types. Because rental housing long has received more and different emphasis, such as the development of government sponsored enterprises, multifamily lending has evolved differently than lending for other commercial segments. Some aspects of multifamily lending, such as securitization, came about much earlier. The multifamily market bears watching as a possible precursor to changes in other commercial lending markets.

Multifamily mortgages totaled about $360 billion in second-quarter 1999, an increase of 2.3 percent over the first quarter. GSEs and federal mortgage pools are additional players in the multifamily market, while commercial banks are not nearly as dominant as with other property types.

The segment showing the largest increase in multifamily mortgages was GSEs with a 10.4 percent increase. Other participants with significant jumps in outstanding mortgages were CMBS issuers with 4.8 percent, commercial banks with 4.3 percent growth, and federal mortgage pools with a 4.2 percent gain. Savings and loans actually declined by 3 percent, reflecting a general declining trend for them in this area since 1993.

Outstanding multifamily mortgages are 16 percent greater than at the end of 1997 and 5.6 percent greater than at year-end 1998. The segment with the greatest gain has been private CMBS issuers with a startling 72.9 percent growth since the end of 1997. The product clearly has appeal to investors, possibly because multifamily has a lower vacancy volatility than other property types and rental rates have a shorter duration and greater market adjustment. Federal pools and GSEs are the next biggest gainers at 39.4 percent and 23.1 percent.

REITs have shown some dramatic changes — both in assets and liabilities — in their debt positions in the multifamily market. The amount of REIT multifamily debt owed has increased by 57.8 percent since 1997, reflecting REITs' need for debt capital in the current market due to the scarcity of equity capital for financing acquisitions. Similarly, REIT debt assets have declined 9.5 percent during the same time frame, showing the difficulty that mortgage REITs are experiencing.

Multifamily market share changes also are interesting. Private CMBS issuers have picked up 5 percent market share, reaching 14 percent since the end of 1997. Most of this has come at the expense of savings and loans, which suffered a 4 percent market share decline in the same period. Six major multifamily lenders have market shares in the range of 14 percent to 21 percent. This clearly is a different dispersion of capital availability compared to other property types. The influence of GSEs and federal pools has made multifamily market segments more comparable in size than is true in other commercial markets.

Clearly, debt capital remains available for commercial real estate. The direction and magnitude of changes in rates and spreads over the next 12 months will determine whether the availability trend continues.

Claude Werner

Claude Werner is the national director of real estate research at Deloitte & Touche LLP in Atlanta. Contact him at (404) 220-1733 or


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