In the most active U.S. commercial real estate investment markets, New York City chief among them, measures of quality for newly originated mortgages declined between the first and second quarters of this year, according to a report released last week by Chandan Economics.
The deterioration in debt yield at origination, a statistically valid predictor of a commercial mortgage’s lifetime default probability, was most evident for loans secured by central business district office properties and by high-rise apartment buildings. This finding is consistent with a rapid rebound in prices for these assets, fueled by more aggressive competition between investors and among lenders seeking to make loans secured by core assets in the most liquid markets.
While apartment and office loan standards are easing, neither investors nor lenders have shown the same vigor in pursuing industrial and retail properties. Across all markets, industrial debt yield has fallen only slightly over the past six quarters, converging on retail debt yield levels in the second quarter. Apartment and office yields have fallen more precipitously, however, as lending has responded to improving property values and rising expectations of future income growth. Read More