MBA 1Q Commercial/Multifamily DataBook Reports Vacancy Rates, Asking Rents Up Slightly

MBA NewsLink Staff

July 11, 2018


Commercial property vacancy rates ticked up slightly from last year's first quarter, but so did asking rents, the Mortgage Bankers Association First-Quarter 2018 Commercial/Multifamily DataBook reported.

The DataBook summarizes major trends that developed during the quarter. Charts and tables provide historical information on commercial and multifamily real estate markets.

"After two years of declines, property sales transactions held firm in the first quarter," said MBA Vice President of Commercial Real Estate Research Jamie Woodwell. "Total sales volume for the major property types rose three percent from first-quarter 2017 to first-quarter 2018."

Woodwell noted commercial property capitalization rates have generally trended downward. Apartment cap rates held steady at 5.6 percent between late 2017 and the first quarter but are down from a year earlier. Investor interest pushed industrial cap rates down to 6.4 percent from 6.9 percent in early 2017. Retail cap rates came in at 6.5 percent during the first quarter, flat from a year earlier. Office cap rates were flat from a year earlier at 6.7 percent.

"The drop in cap rates, coupled with net operating growth, has generally continued to push property values higher," Woodwell said. He noted Real Capital Analytics' property price index increased 1.6 percent during the first quarter and the NCREIF transaction-based index rose 3.1 percent. The Green Street Advisors price index, on the other hand, showed a decline for the quarter.

Economy
The U.S. economy continued its strong performance during the first quarter. Real GDP grew at a 2.2 percent seasonally adjusted annual rate. The U.S. added 176,000 jobs in January, 324,000 in February and 155,000 in March.

Job growth has continued with an additional 159,000 in April and 223,000 in May, despite an unemployment rate that has fallen to 3.8 percent and the fact that there are now more job openings than there are unemployed. The tight labor market has pushed hourly wages up 2.7 percent over the last year, one of the highest readings since 2009.

Consumer spending has continued to grow, with retail sales excluding motor vehicle and parts dealers increasing 6.6 percent between May 2017 and May 2018. E-commerce accounted for 9.5 percent of total retail sales in Q1 2018, compared to 8.5 percent a year earlier.

The yield curve continues to flatten. The 10-year Treasury averaged 2.98 percent in May, up 68 basis points from a year earlier. The two-year Treasury averaged 2.51 percent in May, up 121 basis points from a year earlier. During that period, the 10-year/two-year spread has narrowed from 100 basis points to 47 basis points. In late June the spread equaled 34 basis points.

Sales
After two years of declines, property sales transactions held firm in the first quarter. Total sales volume for the major property types rose three percent between first-quarter 2017 and first-quarter 2018. Sales were buoyed by increases in apartments (a 25 percent increase from $27 billion in Q1 2017 to $35 billion in Q1 2018) and industrial properties (a 34 percent increase from $16 billion in Q1 2017 to $21 billion in Q1 2018) properties. Sales of office properties fell by 12 percent and retail fell by 31 percent.

Commercial property capitalization rates, meanwhile, have generally been on the decline. Apartment cap rates held steady at 5.6 percent between Q4 2017 and Q1 2018, but are down from a year earlier. Investor interest has pushed industrial cap rates down to 6.4 percent, from 6.7 percent during Q4 2017 and 6.9 percent during Q1 2017. Retail cap rates came in at 6.5 percent during Q1 2018, flat from a year earlier and down 10 basis points from Q4 2017. And office cap rates were flat from both a year earlier and from Q4 at 6.7 percent.

Originations
Borrowing and lending backed by commercial real estate started 2018 at roughly the same pace it started 2017. The property types drawing the most attention of late continued to follow different paths, with retail originations declining while multifamily and industrial increased. It was the strongest first quarter on record for originations of loans for life insurance companies and GSEs Fannie Mae and Freddie Mac.

A rise in originations for hotel, multifamily and industrial properties led the overall increase in commercial/multifamily lending volumes compared to first quarter 2017. The first quarter saw a 54 percent year-over-year increase in the dollar volume of loans for hotel properties, an 18 percent increase for multifamily properties, a 14 percent increase for industrial properties, a one percent decrease for office properties, a 27 percent decrease in retail property loans and a 39 percent decrease in health care property loans.

Among investor types, the dollar volume of loans originated for commercial mortgage backed securities increased by 12 percent year-over-year. Life insurance company loans increased 9 percent, government-sponsored enterprise (Fannie Mae and Freddie Mac) loans increased 8 percent and loans originated for commercial bank portfolios loans decreased 23 percent.

Mortgage Debt Outstanding
During the first three months of 2018, commercial and multifamily mortgage debt outstanding increased more than during any other first quarter since before the Great Recession. Interestingly, first-quarter holdings grew more slowly this year than last among the three largest investor groups: banks, life insurance companies and the GSEs. This year's increase was driven by the commercial mortgage-backed securities market, which added $6 billion of mortgages to its balances. This stands in sharp contrast to the $21 billion decline over the same period in 2017.

"For the first time since 2007, CMBS has seen three straight quarters of increase," Woodwell said.

The level of commercial/multifamily mortgage debt outstanding increased by $44.3 billion in the first quarter as all four major investor groups increased their holdings. That represents a 1.4 percent increase over fourth-quarter 2017. Total commercial/multifamily debt outstanding rose to $3.21 trillion at the end of the first quarter. Multifamily mortgage debt outstanding rose to $1.3 trillion, an increase of $19.3 billion, or 1.5 percent, from fourth-quarter 2017.

Mortgages backed by commercial and multifamily properties continue to perform extremely well. Delinquency rates are at or near their all-time lows across most capital sources. This continues to be driven by strong property fundamentals, increasing property values, still-low mortgage rates and readily available financing. Based on the unpaid principal balance of loans, delinquency rates for each group at the end of the first quarter were as follows:

--Banks and thrifts (90 or more days delinquent or in non-accrual): 0.51 percent, unchanged from fourth-quarter 2017;
--Life company portfolios (60 or more days delinquent): 0.02 percent, a decrease of 0.01 percentage points from fourth-quarter 2017;
--Fannie Mae (60 or more days delinquent): 0.13 percent, an increase of 0.02 percentage points from fourth-quarter 2017;
--Freddie Mac (60 or more days delinquent): 0.02 percent, unchanged from fourth-quarter 2017;
--CMBS (30 or more days delinquent or in REO): 3.93 percent, a decrease of 0.15 percentage points from fourth-quarter 2017.

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