2022 Q4 Quarterly Databook

March 31, 2023 Jamie Woodwell; Reggie Booker


There is a great deal of uncertainty about the future path of the U.S. economy, partially driven by -- and partially contributing to -- decisions that will be made by the Federal Reserve.

The economy ended 2022 on a strong note, with inflation-adjusted gross domestic product growing at a seasonally adjusted annual rate of 3.2 percent in Q3 and 2.6 percent in Q4. That growth came after declines of 1.6 percent in Q1 and 0.6 percent in Q2, leading to growth of just 0.9 percent for 2022 as a whole.

That year-end strength was also seen in labor markets. Firms added a seasonally adjusted net 324,000 jobs in October, 290,000 in November and 239,000 in December, before kicking 2023 off with an even more robust 504,000 in January and 311,000 in February. The 2022 growth pushed the unemployment rate down to 3.5 percent in December before an uptick in the overall labor force drew unemployment back up to 3.6 percent (still a very low number) in February.

All that growth has continued to put upward pressure on prices. In February, core prices as measured by the CPI were 5.5 percent higher than they had been a year earlier. That's down from a 6.6 percent rate of growth in September, but still much higher than the Federal Reserve's target of 2 percent.

The uncertainty, both about the direction of the economy and how the Fed might react, has heightened interest rate volatility. The Fed has lifted the lower limit of the Fed Funds target rate from 0.0 in February 2022 to 4.75 as of their March 2023 meeting. With many questions about where the economy may be headed from here, there are also questions about whether the Fed will continue to raise and hold the Fed Funds rate to the 5.1 percent year-end 2023 level shown as the median projection in the latest economic projections of FRB members and bank presidents, or whether they will need to adjust course.

In either case, the Fed's actions and the uncertainty they are bringing has led to significant volatility. The difference between the highest and lowest average daily yields for Ten-year Treasuries during October was 43 basis points (bps) in January, 56 bps in February and has been 73 bps in March. The monthly average in 2021 was 24 bps and in 2020 25 bps.

Different property types are experiencing very different space market conditions.

Office markets are under the greatest scrutiny as hybrid and other pandemic-fueled work patterns have disrupted the regular flow of leasing. According to Moody's, the Q4 office vacancy rate was 18.7 percent - the highest in their series going back to at least 2002. Where it goes from here will depend on a variety of factors, including growth of the workforce and how employers do (and don't) change their per[1]employee space needs going forward. It's also important to note that not all office is created equal and that some properties will likely power through these market changes while others will face significant adjustments.

Retail properties have also seen increased differentiation, with marked differences between subtypes like grocery-anchored centers and class[1]B malls. From an investor and lender perspective, industrial and multifamily probably remain the most sought after property types. Both markets are very tight, although they are also each absorbing strong development pipelines. As an example, at 6.5 percent, the multifamily rental vacancy rate in Q4 2022 was among the lowest levels ever recorded. At the same time, the 941,000 multifamily units under construction in February represent the largest pipeline in that series' history.

Increases and volatility in interest rates and uncertainty about property values have slowed commercial real estate transactions. Last year (2022) started off strong, with Q1 sales 72 percent higher than the previous year and Q2 sales up 34 percent from a year earlier. As changes in interest rates and property values began to bite, volume slowed, with Q3 volume down 15 percent and Q4 down 61 percent from the year earlier. For the year as a whole sales activity was 14 percent lower than 2021.

The slowdown was felt across property types, with Q4 sales down 69 percent from a year earlier for apartment properties, 65 percent for office, 58 percent for industrial and 57 percent for retail. It is worth noting that Q4 2021 was by a large margin the strongest quarter in history for sales activity.

Part of the challenge for the market comes from a lack of clarity around property values. According to the MSCI/Real Capital Analytics and the National Council of Real Estate Investment Fiduciaries (NCREIF), commercial property values ended the fourth quarter down 4 percent from the 2022 highs. According to Green Street Advisors they were down 14 percent. It seems clear that the reported values are lagging what the market is working through and it is hard to track market activity when there is a dearth of market activity.

Real Capital Analytics January data showed January cap rates still at all time-lows for apartment (4.7%) and within 10 basis points of record lows for industrial properties (5.4%), and retail (6.4%) and within 20 basis points for office (6.4%). Given that the Ten-year Treasury yield averaged 3.5 percent in January, that would imply the spread between apartment cap rates and the Ten-year Treasury yields was roughly 200 basis points tight of its average over the last two decades - not likely given current market conditions.

We expect the reported data on values to slowly catch-up with the market realities, although that will be dependent on an increase in transactions to be able to benchmark against.

Borrowing and lending backed by commercial and multifamily properties also slipped to close out 2022. The last quarter of the year typically sees the highest volumes, but the chill caused by rising interest rates, questions about property valuations, and increased economic uncertainty made the fourth quarter of 2022 the weakest of the year. Depositories were the one major capital source to increase volumes from the previous year, but even their fourth quarter activity was roughly half of what it was a year earlier. The overall picture is one of slower borrowing in the face of what have been significant shifts in the market.

Decreases in originations for industrial, office, multifamily, and retail, properties led the overall drop in commercial/multifamily lending volumes when compared to the fourth quarter of 2021. There was a 69 percent year-over-year decrease in the dollar volume of loans for industrial properties, a 56 percent decrease for office properties, a 52 percent decrease for multifamily properties, a 46 percent decrease for hotel properties, and a 44 percent decrease for retail properties. Health care property loan originations increased 4 percent compared to the fourth quarter of 2021.

Among investor types, the dollar volume of loans originated for commercial mortgage-backed securities (CMBS) decreased by 92 percent year-over-year. There was a 60 percent decrease for investor[1]driven lenders, a 53 percent decrease in life insurance company loans, a 47 percent decrease for depositories, and a 13 percent decrease in the dollar volume of government sponsored enterprises (GSEs - Fannie Mae and Freddie Mac) loans.

A preliminary measure of commercial and multifamily mortgage bankers' originations volumes shows activity in 2022 was 10 percent lower than in 2021. By property type, mortgage bankers originations for office properties decreased 30 percent from 2021, industrial properties decreased 12 percent, and multifamily properties decreased 11 percent. Retail properties increased 16 percent, hotel properties increased 16 percent, and health care property originations increased 23 percent.

Among investor types from 2022 compared to 2021, mortgage bankers originations for CMBS decreased 63 percent, originations for life insurance companies decreased 19 percent, loans for investor-driven lenders decreased 9 percent, and loans for GSEs decreased 4 percent. Depository loans increased 22 percent.

As more data comes in, MBA will be updating and releasing final 2022 volumes.

MBA's updated forecast is built on a base case of economic weakness at the start of 2023 with a moderation in interest rates and an overall improvement in the economy as the year goes on. Given changes in interest rates and investment yields over the last year, new deals and loans are sizing differently than in previous years. These new changes will take time for buyers and sellers to digest, and we expect the logjam to suppress volumes this year.

We expect loan maturities and outstanding adjustable-rate loans to lead the testing of today's market conditions. For long-term loans, the last decade has seen tremendous growth in property incomes and values - both of which will support properties' abilities to support new loans. Properties with interest rate resets and shorter-term loans that transacted or refinanced more recently will be much more dependent on the particulars of that loan and property.

Total commercial and multifamily mortgage borrowing and lending is expected to fall to $684 billion this year, which is a 15 percent decline from an expected 2022 total of $804 billion. Multifamily lending alone (which is included in the total figures) is expected to drop to $384 billion in 2023 - a 16 percent decline from last year's expected total of $459 billion. MBA anticipates borrowing and lending will rebound in 2024 to $906 billion in total commercial real estate lending, with $486 billion of that total in multifamily lending.

Commercial and multifamily mortgage debt outstanding grew at another strong clip in 2022. The rate of growth was the second largest since 2007 - just below 2021's pace. Among capital sources, depositories led the growth, increasing their holdings of commercial and multifamily mortgages by 12 percent. Additionally, growth in multifamily mortgage balances accounted for almost half of the annual increase.

Total mortgage debt outstanding rose by 1.7 percent ($77.9 billion) in fourth-quarter 2022. Multifamily mortgage debt grew by $35.6 billion (1.8 percent) to $1.96 trillion during the fourth quarter and by $148.2 billion (8.2 percent) for the entire year.

In the fourth quarter of 2022, commercial banks saw the largest rise in dollar terms in their holdings of commercial/multifamily mortgage debt, with an increase of $38.5 billion (2.2 percent). Agency and GSE portfolios and MBS increased their holdings by $27.3 billion (2.9 percent), life insurance companies increased their holdings by $10.8 billion (1.6 percent), and REITs increased their holdings by $5.6 billion (3.2 percent). CMBS, CDO and other ABS issues saw the largest decline (1.2 percent) in their holdings by $7.4 billion.

The $35.6 billion rise in multifamily mortgage debt outstanding between the third and fourth quarters of 2022 represented a 1.8 percent increase. In dollar terms, agency and GSE portfolios and MBS saw the largest increase, at $27.3 billion (2.9 percent), in their holdings of multifamily mortgage debt. Commercial banks increased their holdings of multifamily mortgage debt by $14.3 billion (2.4 percent), and life insurance companies increased holdings by $2.1 billion (1.1 percent). CMBS, CDO and other ABS issues saw the largest decline (11.9 percent) in their holdings, by $8.1 billion.

Commercial and multifamily mortgages tend to be relatively long-lived in nature. In 2023, only one-in-eight dollars of non-bank-held CRE loans will be maturing. Some property types, in particular hotels, motels, and offices, have higher shares of their debt coming due in the near term, while others, such as multifamily, have lower shares. Among capital sources, investor-driven lenders and the CMBS market have more of their loans coming due in the near-term while life companies, the GSEs, and FHA have fewer. Given current dislocations in the market, loan maturities will be a key mechanism that will force adjustments to changes in interest rates and property values since those loans were originally made.

Loan maturities of non-bank-held loans vary significantly by investor and property type groups. Just $13.9 billion (2 percent) of the outstanding balance of multifamily and health care mortgages held or guaranteed by Fannie Mae, Freddie Mac, FHA, and Ginnie Mae will mature in 2023.

Life insurance companies will see $42.2 billion (7 percent) of their outstanding mortgage balances mature in 2023. By contrast, $163.3 billion (22 percent) of the outstanding balance of mortgages in CMBS, CLOs or other ABS, and $111.8 billion (26 percent) of the mortgages held by credit companies, in warehouse or by other lenders will mature in 2023.

By property type, 5 percent of non-bank mortgages backed by multifamily properties will mature in 2023, as will 11 percent of those backed by retail and healthcare properties. Among loans backed by industrial properties, 16 percent will come due in 2023, as will 22 percent of office loans and 32 percent of hotel/motel loans.

This year, for the first time, we have expanded our loan maturity analysis to include an estimate of the maturity profile of all commercial and multifamily mortgages - including the more than $1.7 trillion on bank balance sheets.

The analysis estimates that of approximately $4.4 trillion of outstanding commercial/multifamily mortgages, $728 billion (16%) matures in 2023 with another $659 billion (15%) maturing in 2024. Hotels/motels see the largest share of their loans maturing in 2023 (34%) followed by office (25%). Multifamily is the property type with the smallest share of outstanding mortgage debt maturing this year, 9 percent.

Among capital sources, 26 percent of the outstanding balance of loans held by credit companies and other investor-driven lenders will mature this year, as will 23 percent of the balances held by depositories and 22 percent held in CMBS. Only 7 percent of life company loans and 2 percent of GSE/FHA loans come due this year.

Commercial and multifamily mortgage delinquency rates remained low at the end of 2022. There were slight upticks among loans in CMBS, life companies, and banks and decreases for Fannie Mae and Freddie Mac but the overall performance remained positive. It is likely that as higher interest rates and softer property values work through the system this year - prompted by maturing and adjustable-rate loans - loan performance will adjust.

Based on the unpaid principal balance (UPB) of loans, delinquency rates for each group at the end of the fourth quarter of 2022 were as follows: Banks and thrifts (90 or more days delinquent or in non-accrual): 0.45 percent, an increase of 0.01 percentage points from the third quarter of 2022;

  • Life company portfolios (60 or more days delinquent): 0.11 percent, an increase of 0.02 percentage points from the third quarter of 2022;
  • Fannie Mae (60 or more days delinquent): 0.24 percent, a decrease of 0.02 percentage points from the third quarter of 2022;
  • Freddie Mac (60 or more days delinquent): 0.12 percent, a decrease of 0.01 percentage points from the third quarter of 2022; and
  • CMBS (30 or more days delinquent or in REO): 2.90 percent, an increase of 0.13 percentage points from the third quarter of 2022.

Looking at data from MBA's own survey of commercial and multifamily loan performance, the balance of commercial and multifamily mortgages that are not current increased in December 2022 (compared to September 2022). 98% of outstanding loan balances were current or less than 30 days late at the end of the fourth quarter, down from 98.3% at the end of the third quarter of 2022.

  • 1.6% were 90+ days delinquent or in REO, up from 1.4% six months earlier.
  • 0.1% were 60-90 days delinquent, unchanged from the previous quarter.
  • 0.3% were 30-60 days delinquent, up from 0.2%.

Loans backed by lodging and retail properties continue to see the greatest stress. Both also saw upticks in delinquency rates.

  • 6.1% of the balance of lodging loans were 30 days or more delinquent, up from 5.5% at the end of September 2022.
  • 5.4% of the balance of retail loan balances were delinquent, up from 5.3%.
  • 1.6% of the balance of office property loans were delinquent, up from 1.5%.
  • 0.3% of the balance of industrial property loans were delinquent, down from 0.6%.
  • 0.5% of multifamily balances were delinquent, up from 0.4%.

Because of the concentration of hotel and retail loans, CMBS loan delinquency rates are higher than other capital sources, but they also saw improvement.

  • 3.2% of CMBS loan balances were 30 days or more delinquent, down from 3.3% in September 2022.
  • Non-current rates for other capital sources were more moderate.
  • 0.8% of FHA multifamily and health care loan balances were 30 days or more delinquent, up from 0.6%.
  • 0.4% of life company loan balances were delinquent, flat from 0.4%.
  • 0.2% of GSE loan balances were delinquent, down from 0.3%.

MBA's CREF Loan Performance survey collected information on commercial and multifamily mortgage portfolios as of December 31, 2022. This month's results build on similar surveys conducted since April 2020. Participants reported on $2.4 trillion of loans in December 2022, representing more than half of the total $4.4 trillion in commercial and multifamily mortgage debt outstanding (MDO)