MBA CREF Forecast - January 2023

January 5, 2023 Jamie Woodwell; Reggie Booker

At the end of 2021, the typical (median) member of the Federal Reserve’s Open Market Committee expected the Fed Funds rate to end 2023 at 1.6 percent.  In June 2022 that figure had risen to 3.8 percent.  In December 2022 it had risen again, to 5.1 percent.  

Those shifts in outlook from the Fed are both a response to changing economic conditions as well as a cause of change themselves.  And commercial real estate markets are not immune to either, with uncertainty – and volatility – around the paths of the economy, interest rates and property valuations all causing significant instability for the market.

MBA’s forecast for commercial real estate finance (CREF) markets is built on our outlook for the economy at large, which sees many key economic measures in a period of dislocation caused by the Fed’s fight against inflation.

Inflation itself remains elevated but is expected to (slowly) subside through a reduction in the fiscal, monetary, supply chain, war, and other stimuli that have pushed it to fifty-year highs.  To speed up that decline, however, the Fed is expected to continue to pressure the economy, pushing short-term interest rates and unemployment rates higher in 2023 before easing the Fed Funds rate in 2024, which should help temper unemployment as well.

Anticipating that, longer-term rates like the yield on the Ten-year Treasury are already moderating – falling from 4.5 percent earlier in the year to 3.5 percent in mid-December.  But the overall rise in interest rates, coupled with a cooling economy, has already taken the wind out of many parts of the economy, including what had been a rapid rise in home prices.  For more on MBA’s macro-economic forecast, click here.


Given that economic backdrop, what’s the outlook for commercial real estate finance?

MBA’s CREF forecast looks at past relationships between key macroeconomic variables and the commercial real estate market to develop a baseline projection.  The CREF forecast is one of many potential paths the market may take and is dependent both on the accuracy of the macroeconomic forecast and on consistent relationships between various factors over time.  

One of the key learnings from MBA’s research on commercial mortgage lending is that as go property values, so go origination volumes.  As a result, the most important element of any forecast of the CREF market is a prediction of where property prices might be headed.

This is particularly daunting now, as the most recent data on capitalization (cap) rates appears to be reflecting past market conditions that have changed significantly over recent months.

If one follows the numbers being reported as of Q3 2022, averaging data from Real Capital Analytics and NCREIF, cap rates on commercial mortgages are roughly 4.5 percent, down from 4.9 percent a year earlier.  With the Ten-year Treasury yield rising from an average of 1.3 percent in Q3 2021 to 3.0 percent in Q3 2022, that implies that cap rate spreads (the difference between cap rates and the Ten-year Treasury) fell from 350 basis points (bps) in Q3 2021 to 150 bps in Q3 2022 – approaching the tightest levels seen during the 2007.  Conversations with market practitioners raise doubts those figures reflect reality.

If instead one looks at the traditional relationships between macroeconomic conditions and what they imply for cap rates, one would expect the cap rate spread to be closer to 290 bps, leading to a cap rate of 5.9 percent.  All else being equal, that implies a drop in property values of 30+ percent between Q3 2021 and Q3 2022.

Looking ahead, after taking into account the abrupt upward shift in cap rates caused by the rise in interest rates, the anticipated economic slowdown and other factors, cap rates should begin to decline – driven primarily by the moderation in longer-term interest rates.



But cap rates alone do not determine property values.  Property incomes are the other key ingredient, and with the exception of uncertainty around office properties, fundamentals for most other proeprty types remain solid.  Accordint to the National Council of Real Estate Investment Fiduciaries, over the four quarters ending with Q3 2022, NOIs for office properties fell 0.8 percent while they increased 4.08 percent for retail properties, 13.6 percent for industrial properties and 17.6 percent for apartment properties.

Those same levels of NOI growth are unlikely in coming quarters but they certainly cushion the impacts of changes in cap rates.  Based on our models, we expect NOIs to grow an average of 1.4 percent per quarter over the next 3 years – helping further buoy property values.


The combination of increases in both cap rates and NOIs imply a sharp near-term adjustment to property values – in the magnitude of 25 percent on a year-over-year basis – followed by a return to strong increases as NOIs continue to climb and cap rates recede.  It is important to note that the depth of the decline could be significantly moderated by market participants’ expectation about that future growth.  Why sell at a discounted rate today if one expects values to rebound tomorrow?   This is one of many complicating factors that add heightened uncertainty to the shape and timing of our forecast.



As mentioned above, as go property values, so go origination volumes.  Given that, and tracing the expected path of the macroeconomy through to property cap rates and incomes, our forecast anticipates a sharp slowdown in commercial and multifamily borrowing and lending the latter half of 2022 and first half of 2023 before beginning to see a bounce back.  We anticipate total commercial/multifamily lending of $740 billion in 2022 (down 17 percent from 2021’s record year) followed by another drop (of 5 percent) to $700 billion in 2023.  Lending should then grow in both 2024 (to $887 billion) and 2025 (to $966 billion, a new record).


MBA’s forecast also includes a breakout for borrowing and lending backed by multifamily rental properties.   The major drivers and general shape of changes for the apartment market are similar to those for the broader commercial/multifamily market, although they differ in some details.  (See the charts below).  Our forecast anticipates multifamily borrowing and lending of $439 billion in 2022 (down 10 percent from 2021’s record year) followed by another drop (of 11 percent) to $393 billion in 2023.  Lending should then grow in both 2024 (to $483 billion) and 2025 (to $527 billion, a new record).