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A Growing Sense of Optimism Among Loan Originators Could Benefit Commercial Real Estate Owners
February 2025
Key Highlights
As commercial real estate deal activity increases, some capital providers are rolling out new programs and considering reshuffling allocations.
Talonvest’s Capital Markets team conducted 40+ lender meetings during the MBA Annual Conference from Feb 10-12th in San Diego, and lenders were much more optimistic than in recent years.
Although lenders appear to be gearing up for increased activity, many continue to place a strong emphasis on asset location and lease-up prospects.
Industry Players Are Excited at the Possibility of Increased Lending Activity in 2025
Through the early weeks of 2025, we have observed that some lenders, especially securitized lenders, have boosted origination expectations for the year on the heels of an increase in deal activity. Anecdotal evidence suggests the competition for the highest quality deals is becoming somewhat more intense, with some lenders offering better pricing.
At a recent Mortgage Bankers Association conference, discussion was noticeably more optimistic compared to the last two years. A bullish sentiment surrounded the prospect of capital deployment over the remainder of the year. Some lenders were willing to assert the expectation that capital deployment for 2025 will increase by up to 50% on a year-over-year basis. Several lenders spoke about launching new programs or refining existing ones to remain competitive in the event the industry experiences a meaningful uptick in activity.
At a recent Mortgage Bankers Association conference, discussion was noticeably more optimistic compared to the last two years. A bullish sentiment surrounded the prospect of capital deployment over the remainder of the year. Some lenders were willing to assert the expectation that capital deployment for 2025 will increase by up to 50% on a year-over-year basis. Several lenders spoke about launching new programs or refining existing ones to remain competitive in the event the industry experiences a meaningful uptick in activity.
Bridge Borrowers Stand to Benefit from New and Updated Loan Programs
Of the lenders that have increased origination expectations, many view the bridge market as fertile ground to absorb larger volumes if lending activity experiences a meaningful uptick and property-level operating fundamentals show improvement. In anticipation of increased competition, some non-bank lenders and debt funds are offering or discussing new programs, and some of these programs offer modestly tighter spreads compared to many of the programs we have worked with over the last year.
One example of a bridge program currently available to owners comes from a bridge-focused debt fund offering loan amounts starting at $10 million with spreads over SOFR beginning at 260 basis points and increasing to 365 basis points for higher value-add projects. Origination fees are 100 basis points, and exit fees are 50 basis points. Extensions come with a fee in the range of 25 to 50 basis points depending on the extension term.
Additionally, a European bank seeking to expand its presence in the US bridge debt market is offering non-recourse bridge loans in the $10 million to $35 million range with no deposit requirement. Spreads start at 350 basis points over Treasuries with terms up to five years. The fee structure consists of one point at origination and one point at exit. Extensions can be had for six months at a fee of 25 basis points or twelve months at a fee of 50 basis points.
One example of a bridge program currently available to owners comes from a bridge-focused debt fund offering loan amounts starting at $10 million with spreads over SOFR beginning at 260 basis points and increasing to 365 basis points for higher value-add projects. Origination fees are 100 basis points, and exit fees are 50 basis points. Extensions come with a fee in the range of 25 to 50 basis points depending on the extension term.
Additionally, a European bank seeking to expand its presence in the US bridge debt market is offering non-recourse bridge loans in the $10 million to $35 million range with no deposit requirement. Spreads start at 350 basis points over Treasuries with terms up to five years. The fee structure consists of one point at origination and one point at exit. Extensions can be had for six months at a fee of 25 basis points or twelve months at a fee of 50 basis points.
Asset Location Continues to Be a Driving Factor in the Willingness to Extend Credit
Despite speculation that the commercial real estate industry could see increased origination volumes in 2025, lenders remain discerning. Most lenders continue to focus on asset location as a key factor in credit decisions. Lenders also continue to pay close attention to recent operating results and favor properties with leasing momentum they believe to be sustainable. While lenders have shown a willingness to consider new programs and even improved pricing in certain cases, they are doing so primarily for projects in prime locations that exhibit strong lease-up potential. Assets in markets with robust population growth, favorable supply-demand dynamics, and strong employment fundamentals continue to see the most competition for loan placements.
Will Improved Lender Sentiment Translate to Better Loan Terms for Borrowers?
In today’s market, many lenders are focused on mitigating risk by loaning against physical assets of the highest quality. Accordingly, owners of assets that are well-positioned or possess strong lease up prospects are most likely to capture the upside from new or updated loan programs. Currently, the benefit captured by owners of the highest quality assets is confined to modest spread compression offered by a subset of lenders.
As noted, the possibility that year-over-year loan volumes will increase meaningfully in 2025 is garnering attention throughout the industry. There is a scenario where modest spread compression starts to occur later in the year if competition among lenders ramps up. However, it is too soon to confidently state that risk tolerance will increase. It is also premature to conclude that the introduction of new capital programs will have a significant impact on lender risk tolerances or appetite for updated underwriting criteria designed to pursue more business.
These dynamics will be determined by a variety of factors that are difficult to forecast. In recent months demand for multifamily, self-storage, and industrial space has picked up moderately, and the staying power of this trend could prompt a more definitive response from the lending community. Additionally, the success of lease-up programs for newly delivered projects, short and long-term interest rate movements, and a host of other macroeconomic and geopolitical variables will play a role in shaping the underwriting landscape.
As noted, the possibility that year-over-year loan volumes will increase meaningfully in 2025 is garnering attention throughout the industry. There is a scenario where modest spread compression starts to occur later in the year if competition among lenders ramps up. However, it is too soon to confidently state that risk tolerance will increase. It is also premature to conclude that the introduction of new capital programs will have a significant impact on lender risk tolerances or appetite for updated underwriting criteria designed to pursue more business.
These dynamics will be determined by a variety of factors that are difficult to forecast. In recent months demand for multifamily, self-storage, and industrial space has picked up moderately, and the staying power of this trend could prompt a more definitive response from the lending community. Additionally, the success of lease-up programs for newly delivered projects, short and long-term interest rate movements, and a host of other macroeconomic and geopolitical variables will play a role in shaping the underwriting landscape.
Final Thoughts
An increase in deal activity since the third quarter of 2024 has spurred cautious optimism among the lending community and encouraged some lenders to introduce new financing programs or recalibrate existing ones. It remains to be seen whether this momentum will translate into stronger competition and broader improvements to loan terms. The extent of lender risk tolerance and the willingness to further ease underwriting criteria will depend on a confluence of economic, market, and geopolitical factors over the coming months. For now, borrowers with strong lease-up prospects and well-located assets stand to benefit the most from the current lending environment. As the year progresses, stakeholders should remain attuned to shifts in lender capital allocations, general sentiment in the lending community, and market fundamentals.
Talonvest Capital specializes in structuring and negotiating comprehensive capital solutions for owners of industrial, self-storage, multifamily, office, and retail assets. We create tailored capital solutions for our clients by sourcing cutting-edge lending programs and advising on capital markets trends.
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