MBA Tracks Real Estate Lending Trends in New Report
Real Estate In-Depth | July 2019
WASHINGTON—The Mortgage Bankers Association’s first quarter of 2019 Commercial/Multifamily DataBook was released earlier this month.
The quarterly report summarizes major trends that developed during the first three months of the year.
“Low interest rates and strong property values continue to make commercial real estate an attractive market for borrowers,” said Jamie Woodwell, MBA’s vice president of commercial real estate research.
The U.S. economy grew at a seasonally adjusted annual rate of 3.1% during the first quarter—continuing a 10-year expansion that is setting records. Employers added an average of 174,000 jobs per month during the first quarter, helping drive the unemployment rate to a 50-year low (3.6%). After another strong showing in April (+224,000), job growth slowed in May (+75,000). The tight labor market is helping push wages higher, with average hourly earnings rising 3.1% between May 2018 and May 2019. Even so, inflation has remained low, as the prices of all items (excluding food and energy) have grown by 2% over the same period.
Commercial Real Estate Fundamentals
Both vacancy rates and asking rents have ticked up, with apartment rents leading the pack. Multifamily vacancy rates of 4.8% in the first quarter were 10 basis points higher than a year earlier, while asking rents grew by 4.5%. Office vacancy rates also grew by 10 basis points from a year earlier, to 16.6%, while asking rents increased by 2.2%. Among retail properties, vacancy rates grew by 20 basis points, to 10.2%, and rents increased by 1.6%.
Sales and Pricing
First quarter sales of the four major property types were 9% lower than during last year’s first quarter, with sales of office, industrial and retail properties each down between 14% and 16%. Sales of apartment properties were roughly flat to last year.
Capitalization rates have held relatively steady for most property types. First quarter average cap rates of 6.4% for industrial, 6.5% for retail, and 6.6% for office all match the rates from one year earlier. The first quarter cap rate of 5.4% for multifamily properties was 20 basis points below where it had been during the first quarter of 2018.
The momentum seen in 2018’s record year of borrowing and lending continued in the first quarter of this year. Volumes were higher for nearly every property type, and double-digit growth in loan volume for Fannie Mae and Freddie Mac led the increase among capital sources. Low interest rates and strong property values continue to make commercial real estate an attractive market for borrowers.
Compared to a year earlier, a rise in originations for industrial, health care and hotel properties led the overall increase in commercial/multifamily lending volumes. By property type, industrial (73%), health care (41%), hotels (14%), retail (9%) and multifamily (9%) all saw year-over-year gains by dollar volume. The dollar volume of office property loans was unchanged.
Mortgage Debt Outstanding
Mortgage debt backed by commercial and multifamily income-producing properties continues to grow at a strong pace, with three of the four major capital sources—banks, life companies, and the GSEs and FHA—growing their holdings by more than 1% during the first quarter of 2019. REITs, finance companies and non-financial corporate businesses also showed strong appetites last quarter, with each growing their holdings by more than $1 billion. The depth and breadth of growth among investors signals the interest in the sector.
Total commercial/multifamily debt outstanding climbed to $3.46 trillion at the end of the first three months of the year. Multifamily mortgage debt alone increased $17.9 billion (1.3%) to $1.4 trillion from the fourth quarter of 2018.
Steady U.S. economic growth continues to support the financing and values of commercial and multifamily properties. Commercial/multifamily mortgage delinquencies remain at or near record lows for most capital sources, and it’s hard to imagine loans performing better than they currently do. Given the environment, there’s little reason to expect a marked deterioration of near-term performance, the MBA reported.