The Real Deal New York

Is cheap debt creating a CRE bubble?

Non-bank lending grew by 42% last year
October 11, 2018 11:00AM

From left: Tim Sloan, Janet Yellen, and Jerome Powell (Credit: Getty Images and Free Icons PNG)

Former Federal Reserve chair Janet Yellen, her successor Jerome Powell, Wells Fargo CEO Tim Sloan and Goldman Sachs all agree on one thing: commercial real estate prices are too damn high.

Cap rates have been falling across the country, leaving investors with minuscule returns. Goldman Sachs claimed back in May that commercial real estate may be overvalued by 16 percent. And yet there is no sign of a price correction. The reason: real estate investors continue to have easy access to cheap debt.

Mortgage real estate investment trusts and debt funds increased their commercial real estate lending by 42 percent between 2016 and 2017, Bloomberg reported, citing data from Green Street Advisors. The rise of non-bank lenders more than makes up for cautious banks, who increased their lending by just 4 percent.

The rise of non-bank lenders has been particularly pronounced in New York’s construction market. Three of the top 10 construction lenders in The Real Deal’s January ranking are debt funds.

Buoyed by cheap debt, property investment continues to rise. Consulting firm Deloitte recently said it expects deal volume to increase by 13 percent over the next 18 months. [Bloomberg] — Konrad Putzier