Market Note · Capital Markets and Due Diligence

More Capital, More Competition: How Lending Conditions Are Changing Deal Selection

Loan Volume Has Recovered, But Not Uniformly

After a long stretch of muted transaction activity, lending volume has rebounded meaningfully. CBRE's Lending Momentum Index, which tracks the pace of loan closings the firm arranges across the United States, reached 1.5 in the first quarter of 2026, its highest level in five years, before easing to 1.0 in the second quarter. That second quarter reading sits modestly below the 1.3 level posted a year earlier, but the rebound in loan counts and average loan size still indicates a more active market after the first quarter peak.

The Mortgage Bankers Association captured the same momentum from a different angle. Its data showed commercial and multifamily borrowing rose 52 percent in the first quarter of 2026 compared with the same period a year earlier, the strongest first quarter pace in five years. The MBA also forecast that total commercial mortgage originations would climb 27 percent to 805 billion dollars for the full year 2026.

The recovery is real, but it is not evenly spread. Multifamily and industrial assets continue to attract the deepest lender interest, while parts of the office sector remain difficult to finance at any reasonable price. That divergence matters for deal selection because a rising tide of capital can mask how narrow the truly liquid part of the market still is. Volume statistics describe the average. Investors underwrite specific assets, and the specific asset in a weak submarket may still face a thin lender pool.

Pricing Competition Is Real and Measurable

The clearest sign of a more competitive market is what has happened to spreads. A spread is the premium a lender charges above a benchmark rate to compensate for risk. When lenders compete for a limited pool of quality deals, they accept thinner spreads. CBRE's second quarter data shows commercial mortgage spreads on fixed rate, five to ten year permanent loans fell 21 basis points over the year to 204 basis points. Multifamily spreads fell 15 basis points to 162 basis points. Combined with a modest decline in benchmark rates, this pushed the average mortgage interest rate down to 5.7 percent from 5.9 percent a year earlier.

James Millon, CBRE president and co head of capital markets, described lenders as making concessions on credit spreads to compete for product. That phrase captures the dynamic precisely. Capital is chasing a still limited supply of financeable transactions, so the price of debt is being bid down. For a borrower, cheaper debt improves projected returns and widens the set of deals that pencil. For a disciplined investor, it also raises a warning flag, because pricing that reflects competition among lenders rather than the underlying risk of an asset can reverse quickly if sentiment shifts.

Floating Versus Fixed: A Structural Tilt

One of the more consequential shifts of 2026 is the move toward floating rate debt. A floating rate loan resets periodically with a short term benchmark such as SOFR, while a fixed rate loan locks a single coupon for the life of the term. The choice between them is usually driven by the shape of the yield curve and by how long an investor expects to hold an asset.

In mid 2026 the gap between short term floating pricing and five year fixed pricing widened to roughly 70 basis points. That differential rewards borrowers who accept floating exposure, and it has pulled many sponsors in that direction. Millon noted that borrowers are moving toward floating rate structures, responding to both the cost differential and the prepayment optionality that floaters provide. Floating rate debt is typically easier and cheaper to repay early, which suits investors who plan to sell or refinance within a few years.

The tradeoff is interest rate risk. Floating borrowers usually buy an interest rate cap to limit their exposure if benchmark rates rise, and the cost of those caps has climbed. So the apparent savings on the coupon can be partly offset by hedging costs, and the borrower still carries the risk that rates move against them. For deal selection, the floating versus fixed decision has become a genuine underwriting variable rather than an afterthought. A deal that looks attractive on floating rate assumptions may look very different if the cap expires and has to be replaced at a higher strike.

Underwriting Discipline Has Largely Held

The encouraging part of the 2026 picture is that cheaper, more abundant debt has not translated into reckless underwriting across the board. CBRE's data shows the average debt service coverage ratio rose to 1.43 in the second quarter from 1.34 a year earlier. Debt service coverage measures how comfortably a property's income covers its loan payments, so a higher number means a larger cushion. Debt yield, which measures net operating income against the loan amount, improved to 10.2 percent from 9.7 percent. Loan to value ratios actually declined, with commercial LTV at 59.6 percent and multifamily LTV at 63.3 percent, both lower than a year earlier.

Taken together, these figures describe a market that is pricing more aggressively while sizing loans more conservatively. Lenders are willing to shave their margin, but they are lending against a smaller share of value and demanding stronger income coverage. That combination is healthier than the pattern that preceded past downturns, when thinning spreads went hand in hand with rising leverage.

The Federal Reserve's July 2026 Senior Loan Officer Opinion Survey supports this reading. It found that moderate and modest net shares of banks had eased standards on loans secured by nonfarm nonresidential and multifamily properties respectively, while standards on construction and land development loans were basically unchanged. Demand for construction lending was weaker, and demand for the other categories held roughly steady. In plain terms, banks are cautiously reopening the credit box for stabilized income producing assets while staying disciplined on the riskier construction end.

Sponsor Selection Matters More When Money Is Cheap

When capital is scarce, only the strongest sponsors get financed, and the market does much of the quality control automatically. When capital is abundant and lenders compete, weaker sponsors and marginal deals can also secure debt. That is precisely when the burden of discrimination shifts from the lender to the equity investor.

The lender composition data underscores why this matters. Alternative lenders, which include debt funds and other non bank sources, led non agency closings at 38 percent in the second quarter of 2026, up from 34 percent a year earlier. Banks rose to 30 percent from 24 percent. Life companies held 21 percent. CMBS lenders fell to 11 percent from 19 percent. The growing role of alternative lenders means more flexible, faster capital is available, but it also means a wider range of business plans can be funded, including some that depend on optimistic assumptions.

For an equity investor evaluating a sponsor, the relevant questions have not changed, but their importance has grown. How much of the sponsor's own capital sits alongside the investment. What is the track record through a full cycle, not just the recent recovery. How realistic are the rent growth and exit cap rate assumptions. In a competitive debt market, the sponsors who continue to underwrite conservatively stand out precisely because they are choosing not to stretch when the market would let them.

Downside Protection Is the Real Differentiator

Every deal looks good in a rising market. The deals worth owning are the ones that survive a flat or falling one. The 2026 lending data offers several practical levers for building downside protection into deal selection.

The first is leverage. With loan to value ratios sitting near 60 percent for commercial assets, investors have room to insist on conservative leverage rather than maximizing loan proceeds. Lower leverage reduces the risk that a temporary dip in income or value triggers a covenant breach or a distressed refinancing.

The second is coverage. A debt service coverage ratio of 1.43 at the market level is a reasonable floor, but disciplined investors often want more cushion on assets with lease rollover or tenant concentration risk. The third is the rate structure itself. On floating rate deals, the strike price and remaining term of the interest rate cap deserve as much scrutiny as the going in coupon, because a cap that expires during the hold can expose the deal to exactly the rate risk the investor thought they had hedged.

The refinancing wall remains the backdrop to all of this. Trepp reported that the CMBS delinquency rate rose 51 basis points in July 2026 to 7.86 percent, driven heavily by loans that cannot refinance cleanly at current values, with office the most stressed segment. That figure is a reminder that abundant new lending sits alongside a large stock of older loans that were underwritten in a very different rate environment. Deals that must refinance into higher rates without enough income growth to support them are the ones most likely to disappoint, regardless of how attractive the entry looked.

Why Investors Should Care

The practical takeaway is that the cost and availability of debt have become active variables in deal selection rather than passive inputs. Cheaper, more competitive financing genuinely improves returns and expands the opportunity set, and that is a positive development after several constrained years. But the same competition that lowers borrowing costs can also lower the market's collective standards, because lenders competing for volume are less likely to reject a marginal deal.

For investors, the discipline lies in separating the two. A deal that only works because debt is unusually cheap is a bet on financing conditions. A deal that works at a normalized cost of debt and improves further with today's pricing is a bet on the asset. The second kind is far more durable. The healthiest signal in the 2026 data is that underwriting metrics have held even as spreads compressed, which suggests the institutional core of the market is still pricing risk sensibly even while competing on margin.

Key Risks to Watch

Several risks could change this picture quickly. Spread compression driven by lender competition can reverse fast if credit sentiment turns, repricing deals that were underwritten on today's thin margins. Floating rate exposure leaves borrowers vulnerable if short term rates stay higher for longer or if cap costs rise further at renewal. The refinancing wall remains substantial, and rising CMBS delinquencies show that stress is concentrated rather than gone. Finally, the growing share of alternative lenders introduces capital that is more flexible but also less tested through a full downturn, which could amplify volatility if conditions deteriorate.

Conclusion

The story of commercial real estate lending in 2026 is one of returning confidence tempered by memory. More capital is available, competition has pushed pricing down, and volume has recovered toward multi year highs. Yet underwriting standards have largely held, leverage remains moderate, and income coverage has improved. That combination gives disciplined investors an unusual advantage. They can access attractive financing without being forced to chase deals that only work because money is cheap. The investors who thrive in this phase will be the ones who treat abundant, competitively priced debt as a tool for improving good deals rather than a reason to accept mediocre ones. In a market where capital is easy and competition is fierce, the scarcest resource is still judgment.

Sources

• CBRE, Commercial Real Estate Lending Fundamentals Remain Strong in Q2 2026: https://www.cbre.com/press-releases/commercial-real-estate-lending-fundamentals-remain-strong-q2-2026-cbre
• CBRE, Commercial Real Estate Lending Activity Reaches Five Year High (Q1 2026): https://www.cbre.com/press-releases/commercial-real-estate-lending-activity-reaches-five-year-high-cbre
• CRE Daily, CBRE: CRE Loan Volume Climbs 11% as Lenders Compete on Pricing: https://www.credaily.com/newsletters/national/issue/cbre-cre-loan-volume-climbs-11-as-lenders-compete-on-pricing/
• Scotsman Guide, Commercial real estate loan activity jumps in the second quarter: https://www.scotsmanguide.com/news/commercial-real-estate-loan-activity-jumps-in-the-second-quarter/
• Federal Reserve, July 2026 Senior Loan Officer Opinion Survey on Bank Lending Practices: https://www.federalreserve.gov/data/sloos/sloos-202607.htm
• Mortgage Bankers Association, Commercial/Multifamily Borrowing Increased 52% in the First Quarter of 2026: https://newslink.mba.org/mba-newslinks/2026/may/mba-newslink-friday-may-8-2026/commercial-multifamily-borrowing-increased-52-in-the-first-quarter-of-2026/
• Mortgage Bankers Association, CREF Forecast: Total Commercial Mortgage Originations to Increase 27 Percent to $805 Billion in 2026: https://www.mba.org/news-and-research/newsroom/news/2026/02/09/mba-cref-forecast--total-commercial-mortgage-originations-to-increase-27-percent-to--805-billion-in-2026
• Trepp, CMBS Delinquency Rate Increased 51 Basis Points in July 2026: https://www.trepp.com/trepptalk/cmbs-delinquency-report-july-2026