The people who finance commercial buildings just turned more negative than they’ve been in three years. The CRE Finance Council said Monday that its third-quarter CREFC sentiment index fell 17.5% to 83.3, down from 101.0 last quarter and the lowest reading since the third quarter of 2023. All nine core questions weakened. Ninety-two percent of respondents expect mortgage and cap rates to hurt their business over the next year.
Contractors don’t sit on CREFC’s board. But every privately financed job in the backlog started with someone on that board, or someone like them, saying yes.
What moved the CREFC sentiment index
The survey ran Sept. 21 to 28, with the 10-year Treasury at 5.00%. CREFC notes that’s about a full point above a year earlier even though the federal funds rate is a quarter point lower. Long rates price construction takeouts and permanent loans, and they’ve gone the wrong way.
The swings from one quarter to the next are large:
- Economy: 62% expect it to perform worse over 12 months, up from 24%.
- Borrower demand: 35% expect less, 24% expect more. It’s the first net-negative reading since late 2022.
- Liquidity: 24% expect debt markets to contract, up from 5%.
- Fundamentals: 30% expect occupancy, rents and income to worsen, up from 11%.
Asked where the 10-year closes the year, 78% said 5.00% or higher. Nobody picked a number under 4.50%.
CRE lending terms and the construction pipeline
Two of the topical questions bear directly on whether projects pencil. On credit terms for new loans, meaning loan sizing, interest-only periods and lender protections, 38% expect tightening over the next year and 19% expect modest loosening. No one expects significant loosening.
On values, 46% expect property prices to fall over 12 months. A developer who can’t count on the exit value borrows less against the same building. That gap gets filled with equity or the project waits, and it’s the same arithmetic already keeping apartment deals from penciling even as contractors bid harder for the work.
Respondents’ written comments named fiscal deficits, record Treasury issuance and persistent inflation, with energy and diesel costs called out. We made a similar point when the Fed raised rates last month: the short end isn’t what’s binding.
Data center CMBS spreads get their own question
CREFC asked about data centers for a reason. They’re now the newest large collateral type in commercial mortgage bonds, and the market is charging for it. AAA-rated data center CMBS paid about 165 basis points over benchmarks in mid-September, CREFC said, citing BofA Global Research, against 85 to 120 for other property types. Forty-one percent of respondents expect that spread to widen further. Twenty-two percent expect modest tightening.
That’s the one sector carrying nonresidential construction, and its cost of capital already runs 45 to 80 basis points above everything else at the top of the stack.
Some caution on the instrument. This is a sentiment survey of one trade group’s board, 93% of whom answered, and CREFC doesn’t publish the headcount. It measures what senior lenders expect, not what they’ve originated. Neutral was still the most common answer on seven of nine questions.
The hard number underneath is Trepp’s CMBS delinquency rate, 7.85% in August. Sixty-one percent of the board expects it at 8.00% or higher by Dec. 31.