Lending Momentum Index Sees First Increase in a Year: What It Means for the Market

Recent developments in the financial sector are providing a hopeful outlook for borrowers and lenders alike: the Lending Momentum Index has recorded its first increase in a year. This uptick might signal a significant shift in the credit market, offering potential benefits and challenges for various stakeholders.

Breaking the Downward Trend

The Lending Momentum Index, a vital measure of lending activity and market sentiment, has been on a steady decline for the past twelve months. However, recent data indicates a notable turnaround. The Index has risen for the first time since August of last year, suggesting a potential turning point in the credit market.

What Does This Increase Mean?

The recent rise in the Lending Momentum Index is a positive development for the financial sector. Historically, an increase in this Index is indicative of a more favorable lending environment, reflecting heightened confidence among both lenders and borrowers. This shift could imply that banks and financial institutions are beginning to ease their cautious stance on lending.

Here’s a closer look at the implications of this change:

Improved Access to Credit: For businesses and individuals, this increase could mean easier access to loans and better credit terms. If lenders grow more optimistic, they may be more willing to approve loans and offer competitive rates.
Economic Implications: A rise in lending momentum often correlates with broader economic growth. As borrowing becomes more accessible, it can stimulate spending and investment, potentially fostering a more robust economic recovery.
Investor Sentiment: This development might also signal that the credit market is stabilizing. Improved lending conditions could enhance investor confidence and influence investment strategies.

What’s Driving the Change?

Several factors could be contributing to this shift. Recent stabilization of interest rates and easing inflationary pressures might be encouraging lenders to reassess their risk appetites. Additionally, improving economic indicators and rising consumer confidence could be playing a significant role.

Supporting this optimistic view, CBRE’s recent analysis provides some encouraging figures. Their second-quarter capital markets and lending data show signs of improvement in commercial debt and equity fundamentals:

Investment Volume: Q2 investment volume reached $85.7 billion, marking a 14% increase from the first quarter of 2024. However, it was still down by 3% year-over-year. The Q1 volume had risen 15% from Q4 2023 but dropped 15% year-over-year. Despite the positive quarter-to-quarter improvement in Q2, it’s crucial to note the inherent volatility and the need for more data to confirm long-term trends.
Trailing Four-Quarter Volume: This moving average decreased by 31.9% year-over-year, falling to $341 billion from $500.2 billion. This is the lowest total since Q2 2013, although this short timeframe may not fully capture the overall trend.
CBRE Lending Momentum Index: After five consecutive down quarters, the Index rose 4.3% in Q2. This increase, while encouraging, pertains specifically to CBRE-originated commercial loan closings in the U.S. and may not fully reflect national CRE trends.
Entity-Level Investment: Investment in Q2 surged to $10 billion, largely due to Blackstone’s acquisition of Apartment Income REIT. Without this deal, Q2 investment would have been down 9.3% quarter-over-quarter and 14.4% year-over-year.
Sales by Property Type: For Q2 2024, the distribution of sales was as follows: multifamily ($38.3 billion, 44.7%); industrial ($18.8 billion, 21.9%); office ($10.6 billion, 12.4%); retail ($9.5 billion, 11.1%); hotel ($6.2 billion, 7.2%); and other ($2.3 billion, 2.7%).

Looking Ahead

While the increase in the Lending Momentum Index is a promising development, it’s essential to remain vigilant. The financial landscape can shift rapidly, and ongoing monitoring of lending trends and economic indicators will be crucial for making informed decisions.

At Wheeler Capital Partners, we are dedicated to keeping you updated on key developments in the financial world. Stay tuned for further insights and analysis as we navigate these evolving market conditions together.

Feel free to reach out if you have any questions or need personalized financial advice. Let’s embrace these changing tides and explore the opportunities they may bring!

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Office Space Projected to Decrease by 145M Square Feet

That’s right: 145 million.

Since April 2020, our lives have changed in myriad ways. We’ve become accustomed to our kids being home while “at school.” We’ve stopped eating out, going to the movies, and vacationing. And, many of us have turned our homes into our workspaces. When you combine this factor with the massive job losses resulting from the pandemic, physical office space requirements just won’t be what they were in the past.

A new study finds that the work-from-home increase resulting from the coronavirus pandemic could result in about 145 million fewer square feet of office space by the end of 2021. Global commercial real estate company Cushman & Wakefield have issued a report based on data covering widespread job loss during the pandemic combined with work-from-home mandates that demonstrate a significant decrease in the need for workplaces to provide office space. Their findings indicate a 50% baseline probability that space requirements in the US workforce will decrease by 145 million square feet during 2020 and 2021.

The study also found that the main driving force for this decrease in demand is job loss, and not the work-from-home trend – although both factor in. When compared with past recessions, these findings mean that this is the largest decrease in demand for office space ever. It outpaces the demand decrease from job loss in the Great Recession of 2008 by 30%.

Even when factors such as re-opening the workplace with six-foot distancing rules in place, the study finds that job losses and work-from-home will outstrip the need for physical square footage in the office. And, this trend was actually in place before the pandemic turned our lives upside down. Companies have been looking for ways to decrease spending, and, as a result, have been buying less office space for years.

The report’s 50% probability baseline for the 145 million square foot decrease is bookended as well with other potential scenarios. Depending on the pandemic’s impact on public health, and on the US government’s economic stimulus response (or lack thereof), those other potential scenarios could look better for commercial real estate – or, they could look a lot worse.

The study predicts a 10% possibility that job losses continue longer than anticipated, that Congress does not enact stimulus or economic relief legislation, and that the result is a loss of nearly 300 million square feet of office space – or, a 20% vacancy rate. That’s the worst-case scenario prediction. On the other hand, the scenario could work out with public health improving and job losses being staved off, and there could even be more governmental relief made available. If all goes in this optimistic direction, the study predicts a loss of a mere 69 million square feet of office space, and a vacancy rate that peaks at about 15%. The study gives this outcome a 10% probability rate as well.

If that’s the good news, then the only thing to be concluded from C&W’s findings is that commercial real estate is looking forward to massive decreases in the years, and maybe even generations, to come.

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Is it Possible for Appraisers to Accurately Value Commercial Real Estate During COVID-19?

Commercial real estate is currently in a state of great uncertainty, as is commercial activity in general. Because we do not know what we are facing in the long-term regarding COVID-19, business and property owners are dealing with very negative numbers in the moment that may or may not continue.

During a TreppWire podcast, the Vice President of Commercial Real Estate Product Management, Lonnie Hendry, shared his ideas around accurately evaluating commercial properties during the COVID-19 pandemic. Will it ever be possible for appraisers to accurately value commercial real estate during COVID-19?

Landry explains that one of the largest challenges appraisers are facing is how to provide a view on a property that can be verifiable with hard, timely data. “That opinion has to be based on facts,” Hendry explains further adding that the data is used to calculate property values during periods of market stability including revenues, cap rates, occupancy, and expense ratios. These all come into question during a period like the current one, where sales are non-existent and comps from the last two months are mostly worthless.

Hendry suggests a few potential methods for generating accurate valuations. First by treating COVID-19 as a short-term proposition and valuating the property as stabilized, as he explained, “we’re going to attribute some form of economic obsolescence to this short-term downturn in the marketplace.”

The second approach Hendry offers is dividing a single year’s NOI by a property’s cap rate and reinforcing that calculation with a discounted cash flow analysis. Hendry says, “where you look at maybe the first couple of periods of that discounted cash flow being very negatively impacted by losses in revenue and corresponding cash flow and then ramping up stabilized operation over the remainder of the holding period.”

The third potential scenario includes collecting a store of data that places a distinct emphasis on past downturns and the quantifiable impacts they had on the value of commercial real estate. This may provide some guidance for the rest of this pandemic once the data is collected, organized, and analyzed – and be even more beneficial for the possible next pandemic.

Wheeler Capital Partners President, Joe Wheeler, says “I think this is an unprecedented event where you basically have a total market collapse across most asset types across the nation. And so logic has to come in as well to say, ‘Nobody really knows what the answer is in terms of where that stabilized market is.”

The numbers around commercial properties will continue to be perilous for the foreseeable future. To gain an appropriate appraisal, longer trends will need to be studied. The collapse of 2008 led to a severe new construction contraction, but the market for existing structures didn’t suffer as severe a hit. While uncertainty about new buildings will continue for a time, existing buildings may come back up in value as the nation adjusts to coronavirus challenges.