MBA’s Commercial Real Estate Finance (CREF) Forecast

July 21, 2022 Jamie Woodwell; Reggie Booker

Total commercial and multifamily mortgage borrowing and lending is expected to fall to $733 billion this year, down 18 percent from 2021 totals ($891 billion). This is according to an updated baseline forecast released July 19 by the Mortgage Bankers Association (MBA).

Multifamily lending alone (which is included in the total figures) is expected to drop to $436 billion in 2022 – a 10 percent decline from last year’s record of $487 billion. MBA anticipates borrowing and lending will rebound in 2023 to $872 billion in total commercial real estate lending and $454 billion in multifamily lending.

The rapid changes taking place across space, equity, and debt markets are having a significant effect on commercial and multifamily real estate transaction volumes.  After a record start to the year, we expect that the rise in rates, ongoing uncertainty about supply and demand balances among some property types, and concerns about the direction of the economy will suppress new loan originations in the second half of the year. Most commercial real estate market fundamentals remain strong, with significant increases in the incomes and values of many properties in recent years. These factors are why MBA expects loan demand to begin to bounce back in 2023 and 2024.

The direction of the economy, which remains uncertain, will be a major driver of the magnitude and timing of market changes.  Should the economy enter a recession, which – if it were to happen – would most likely come in the first half of 2023, commercial and multifamily borrowing and lending would likely be further constrained.


MBA’s commercial real estate finance (CREF) forecast builds on our baseline economic forecast (link) which anticipates continued -- albeit slower than trend -- growth in the US economy in this and coming years.  It is important to note that this only one of many potential paths the economy could take.

Our baseline forecast anticipates that inflation will decline but remain elevated through the remainder of this year, as some of the drivers of larger price increases ease (low interest rates, oil price growth, swollen consumer balance sheets) while others remain stubbornly in-place (some supply-chain difficulties, increasing  shelter costs). The baseline forecast anticipates price increases should moderate further in 2023 and return closer to trend in 2024.

Slower than trend economic growth is likely to loosen the tight labor market, pushing the unemployment rate from an average 3.7 percent in 2022 to 4.0 percent in 2023 and 4.5 percent in 2024.  Note that members of the Federal Reserve Board’s Open Market Committee expect (and target) a 4.0 percent unemployment rate in the longer-run.

Short-term interest rates are headed higher in the near-term.   Longer-term rates will likely swing higher and lower but the expectation is that muted economic growth and an eventual return to more moderate inflation will be the key drivers of longer-term rates.  We forecast that the 10-year Treasury yield will likely average 2.9 percent in 2022 and 2.8 percent in 2023 and then fall to 2.5 percent 2024.

Given the expected path of interest rates and mortgage spreads, single-family mortgage rates should trend down as well, as should the pace of increases in home prices – with home price growth falling from a high of 19 percent on a year-over-year basis in the first quarter of 2022 to growth rates of 2.4 to 2.3 percent in 2023 and 2024.


What does all that mean for commercial real estate finance?  Over recent decades the greatest driver of transaction volumes – whether property sales or mortgage originations – has been property values and changes in those values.  Values, in turn, are driven by property incomes and by the capitalization (cap) rates investors use to value those incomes. 

[NOTE: As part of MBA’s Commercial Real Estate Finance Forecast, we release forecasts of annual lending volumes.   In developing those forecasts we also calculate quarterly projections for cap rates, NOI growth, property values and more.  While we do not formally release those projections, we are providing some indications of what those projections hold here.  Given the variability around timing and magnitude, these projections should be viewed as an “impression” of what may happen in a world that looks like our baseline forecast.  They should not be looked to as forecasts of market changes on a quarterly basis.]


Cap rates can be seen to have two components, the risk-free yield and a risk premium.  The risk-free yield is the return an investor can expect to receive in a government security or other extremely safe investment.  The risk premium then adds on the return an investor demands to take on the added risk of a particular investment.  For commercial real estate, the risk premium can be seen in the cap rate spread.


Risk premiums for a variety of investment options have risen in recent months, both to capture the increased risk stemming from economic uncertainty and from a general upward trend in competing yields.  In our baseline projection cap rate spreads trend higher in the coming years but remain at levels tighter than they were during much of the 2010s. When those cap spreads are added the 10-year Treasury yields, we anticipate a short, sharp jump in all-in cap rates. 


At the same time cap rates are projected to increase, so are net operating incomes.  Many parts of the commercial real estate market continue to experience strong fundamentals, with tight vacancy rates and rising rents.  NOI changes will vary by property type but across the universe of commercial properties we project quarterly NOI growth will slow from the recent highs and will stay above longer-term averages.  We use a derived NOI blended from multiple sources and project quarterly growth to fall from an average of 3.3 percent in 2021 to 2.5 percent in 2022, 1.5 percent in 2023 and 1.4 percent in 2024.  During the 2010s this measure of quarterly NOI growth average 0.9 percent. 

Merging the projected paths of cap rates and of NOIs gives us a short, sharp decline in commercial real estate values (as the market adjusts to higher interest and cap rates) followed by a return to property value increases.  Property values could fall 10+ percent in 2022 in response to the rise in cap rates, followed by property price increases of 6 percent in 2023 (as cap rates stabilize and trend downward and NOIs continue to grow) and 9 percent in 2024.


Based on relationships seen over the past decade-and-a-half, our baseline economic forecast implies commercial and multifamily real estate lending is likely to drop by 18 percent in 2022 from record 2021 volumes.   Lending in 2021 was dominated by an outsized fourth quarter, while 2022 exhibited the fastest start to a year on record – meaning the model anticipates a significant fall-off in volume (relative to last year’s activity) the second half of the year. 


As mentioned earlier, there are a variety of different paths the economy may take from here, and a host of different ways the commercial real estate finance markets may react to those paths. 

If the United States were to enter a recession – which if it were to happen would most likely come in early 2023 – the size and shape of the recession would determine commercial and multifamily borrowing and lending levels.  The most likely outcome would be a steeper drop in volumes than what is forecast here.  The magnitude of any further declines would depend on the degree to which a downturn does or does not impact property incomes, as well as any impacts on investors’ valuations of those incomes through cap rates.   Past recessions have presented different situations – with the 2001 recession having a larger impact on NOIs and a smaller impact on cap rates and the 2007 recession having a smaller impact on NOIs and a larger impact on cap rates.  There are also potential paths with stronger economic conditions in which borrowing and lending volumes would be stronger than what we outline here.

We present this particular path and reaction in the hopes that it gives useful insights to MBA members and others and can serve as a tool to use – or to push against – in business planning. 

As always, questions, comments and feedback are appreciated.