THE DROP IN COMMERCIAL REAL ESTATE LENDING AND HOW SBA LOANS CAN HELP By Chris Myers CEO, B:Side Capital, ICBC Associate Member It’s no secret that commercial real estate lending has seen a significant decline recently, with lending volumes dropping 52% in the second quarter of 2023 compared to the same period last year. This drop is being driven by several factors — rising interest rates, economic uncertainty, and lender caution about the commercial real estate market. As a result, lenders are becoming much more selective about loan-to-value ratios and requiring larger down payments. RISING INTEREST RATES DRIVE DOWN LENDING The Federal Reserve has been aggressively raising interest rates in 2023 to combat high inflation. The effective Federal Funds Effective Rate has climbed from near zero to 5.33% as of August 2023. This rapid rise in rates increases borrowing costs and loan payments for commercial real estate investors. As a result, fewer investors are seeking financing, and lenders are being more cautious with lending criteria. Higher interest rates directly impact real estate investors’ ability to qualify for loans and service debt. With higher debt payments, there is an increased risk of delinquencies or defaults if property income declines or refinancing becomes more expensive. This is making lenders nervous, so they are tightening LTV requirements and lending less overall. ECONOMIC UNCERTAINTY CLOUDS COMMERCIAL REAL ESTATE MARKET Broader economic uncertainty is also contributing to the pullback in commercial real estate lending. High inflation, rising rates and fears of a potential recession are making lenders more risk-averse. Commercial real estate is seen as potentially more vulnerable in a downturn compared to other asset classes. 10 | INDEPENDENT REPORT
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