The Real Deal caught up with Joe McBride, the Senior Director of CRE Product at Moody’s Analytics, to get a temperature check on the CRE lending industry. Between rising interest rates and the continued post-COVID fallout, the CRE lending industry is undergoing a major shift in priorities, with more attention being paid to distressed assets as origination volume declines.
On the other hand, the new loans that are being written tend to favor the lender thanks to the changing power dynamic between them and borrowers, creating fresh opportunities for those still in the space. We also spoke with McBride about CreditLens™ CRE, the origination and underwriting tool that manages pipeline, builds underwriting and pricing scenarios, and centralizes all of a lender’s loan data on a single platform alongside Moody’s Analytics’ industry-leading CRE property and market analytics.
Leaving the Land of 0% Interest Rates
The CRE industry as it exists today took shape in the wake of the Global Financial Crisis. “The banks kind of pulled back in a lot of areas,” explains McBride. “They left a gap in the market, and these private credit institutions, these private lenders really stepped up big time. When interest rates are zero, everyone’s a bridge lender.” People under the age of 35 who work in the CRE industry have only ever known a world where interest rates were low, where every piece of property was a safe investment. “The sentiment was that you could buy almost any asset, push rents, sell it a few years later and make a lot of money,” says McBride. However, in the wake of the COVID-19 pandemic, with certain sectors thrown into chaos and interest rates creeping toward pre-2008 levels, McBride says that “we’re getting back to a place where there’s no such thing as a free lunch.”
What this means overall for lenders is that fewer people are borrowing money. “Everyone in the industry kind of understands that origination volumes have been significantly down, especially in Q3 and Q4 of 2022,” says McBride. “And that trend is continuing.” With less demand for new loans, more attention is being paid to reworking existing loans and analyzing extant risk, especially as the cascade of post-pandemic changes to how we work, travel, and spend money continue to unfold. Take, for example, the relative stability of retail post-COVID versus the newfound instability of office leases. “A few years ago, everyone was worried about their exposure to JC Penney,” says McBride. “Now everyone is asking, ‘What’s my exposure to office built before 2004?’” As such, lenders have shifted from competing over basis points on new loans to focusing on distressed assets and workouts, essentially shoring up their existing positions instead of fighting to establish new ones no matter the terms.
The Paradox of Lending
One seemingly strange side effect of this shift is that, while new loan volume is down, the terms of the loans that are being originated are much more favorable for the lenders who end up signing them. “From a lender perspective, if you can get the money out the door, you’re actually getting some pretty quality returns,” says McBride, who breaks down the phenomenon with the following example: “All else equal in terms of collateral and sponsor quality, since entering the higher interest rate environment, banks are offering lower leverage and relatively wider spreads on top of a base rate like SOFR which is 300 to 400 bps higher than before. So, for those still lending, you’re getting higher quality, lower leverage, and significantly higher rates.”
Paradoxically, this has given lenders the upper hand in a market where they previously competed with one another over borrowers. “Before, when you were fighting over basis points, the particulars of your relationship with the borrower or your way of looking at a piece of collateral meant less, because everyone was just trying to get money out the door,” says McBride. Now, with the appetite for commercial real estate lending having diminished, borrowers have fewer options and lenders have more latitude to shape their loans. The stakes for every individual loan have become higher, and finding the right loan product for the right borrower is more complex, but the potential reward is great.
The Right Tool for the Job
As the lending environment changes, and in light of recent defaults and bank failures, lenders have to rework their lending workflows to reflect the new realities. This is where Moody’s Analytics’ tool, CreditLens™ CRE, comes in. CreditLens™ CRE centralizes all of Moody’s high-quality CRE data on one platform, which can then be used to run various lending scenarios to find the best possible loan terms. CreditLens™ CRE combines the efficiency of existing workflow tools with Moody’s Analytics’ treasure trove of industry data, encompassing everything from corporate and private credit ratings to risk scores to market-level analysis like rent and vacancy trends, centralizing the entire world of CRE data on a single platform. “If you have a unified, structured input mechanism, it makes the rest of the portfolio and risk management process a whole lot easier,” says McBride.
With each loan, both new and existing, weighing increasingly heavily on a lender’s books as fewer loans are originated, being able to quickly and accurately assess risk can be the difference between success and failure. By combining loan information and broader analytics, CreditLens™ CRE gives users the ability to run various scenarios with the most up-to-date information available, changing variables like term, amortization, leverage, and rate to see how the potential outcomes should shape the performance and return of a loan. Moody’s Analytics’ property data gives CreditLens™ CRE users the ability to create in-depth, three-to-five-year year projections for an entire portfolio, helping shape business-wide strategy as well as individual loan terms.
The tool is also helpful when working on existing loans, where a new asset manager might need to be brought up to speed quickly on a complex loan that they were just assigned as a workout. “If I’m in the workout group and someone says, ‘This loan is now in your purview,’ I’d be able to open up the system and know everything about that loan quickly,” explains McBride. “I don’t have to go to five different places to gather all the information I need.” In a market where quickly and accurately assessing risk on existing loans is becoming a major part of day-to-day business, CreditLens™ CRE is an invaluable addition to a firm’s toolbox.
“Moody’s is an integrated risk assessment firm ,” says McBride. “As a lender, no matter what’s going on in the market, you’re going to need to do that kind of work and analysis.” CreditLens™ CRE combines Moody’s Analytics’ industry-leading data and analytics with portfolio insights to centralize this workflow in one easy-to-use platform, sparing users the need to bounce between multiple tools and giving them more time to focus on the important work of crafting the best loan terms for themselves and the borrower. If your team is looking for a way to make their lending workflow more efficient, reach out to Moody’s Analytics and sign up for a CreditLens™ CRE demo today.
*Disclaimer: This interview was conducted prior to recent bank failures.
This article was produced by The Real Deal’s Brand Studio Team in conjunction with Moody’s Analytics. For more information about working with our Brand Studio Team please click here.