Debt origination in the third quarter nearly doubled the total for the first half of the year, a signal that the Federal Reserve’s monetary policy pivot could be working to thaw debt markets.
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The third quarter saw $197B in debt origination, bringing the year-to-date total to $441B, according to Avison Young, and putting the total on track to match or exceed 2023 levels.
The total reflects a more than 80% increase compared to the first half of the year, but the majority of underwriting went towards refinancing debt rather than new transactions. Year–to-date transaction volume totaled $181B at the end of the third quarter, down 21% from the same period in 2023.
“With the Fed beginning to place downward pressure on interest rates, refinancing is expected to remain elevated as investors capitalize on a refreshed borrowing environment,” Alex Ern, Avison Young’s lead capital markets researcher, wrote in the report. “Property sales, on the other hand, are not expected to drive an increase in debt origination until next year.”
Each commercial real estate sector saw a downtick in sales volume quarter-over-quarter. The multifamily sector saw the most activity, with more than $20B in sales, while industrial assets were the only other sector to have more than $10B in combined activity. No sector is poised to outperform its 2023 sales volume.
While activity remains muted, there are some green shoots. CBRE saw 22% in annual growth from investment sales through the end of the third quarter, the company announced last week. The firm expects 30% growth in the fourth quarter, Chief Financial Officer Emma Giamartino said on its earnings call.
Avison Young estimates there’s $184B in dry powder on the sidelines that is overwhelmingly targeting opportunistic or value-add deals with return rates north of 20%. Deals with those outsized returns have not yet come to market in force, and 81% of the funds raised in 2023 remain available for deployment.
“We are seeing investment sales bottom out and with the Fed beginning to place downward pressure on interest rates, we expect significant pick-up of sales in 2025,” Ern said in a statement. “There is a lot of dry powder out there that is ready for deployment.”
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Significantly more refinancing debt will be needed to service a surge of loan maturities coming due that exceeds $300B each year through 2029. Multifamily loans account for the majority of the debt, but each of the next three years will also see at least $100B in office loan maturities.
Banks have been willing to extend loan terms and reach for temporary solutions during the market’s pandemic-era slump, and foreclosure initiations in the third quarter were at their lowest levels since mid-2022, according to Avison Young.
The Fed’s 50-basis-point cut in September, along with improving market conditions in the multifamily and office sector, helped cut down on foreclosures, Ern wrote.
But banks' flexibility during the recent period of high rates has increased the fragility of the U.S. economy and obscured risk in the market, according to a recent report from the New York Federal Reserve Bank.
Rebel Cole, professor of finance in the College of Business at Florida Atlantic University, told CoStar that he had conducted a study of 4,594 banks and found that more than 40% of banks had real estate exposure ratios above 300% of their total equity, a benchmark that he said put the bank at greater risk of failure.
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