2017 Q4 Quarterly Data Book
By Jamie Woodwell; Reggie Booker
June 29, 2018
The U.S. economy continued on its pace of growth during the fourth quarter of 2017. The gross domestic product (GDP) grew at a seasonally adjusted annual rate of 2.5 percent as the economy added a seasonally adjusted average of 220,000 new jobs per month. The unemployment rate ticked down to 4.1 percent, where it has remained to start off 2018.
Retail sales jumped at the end of 2017 - averaging more than 6 percent higher in November and December than they had been a year earlier. E-commerce grew to represent 8.9 percent of total sales during the fourth quarter, up from 8.2 percent during the fourth quarter of 2016.
Based on data from the Census Bureau's Housing Vacancy Survey, household growth picked up, with the addition of 1.5 million owner-occupied households during the year and a decline of 76,000 renter households.
Interest rates were relatively stable during the fourth quarter, with the ten-year Treasury yield averaging 2.37 percent, before rising to average 2.58 percent in January and 2.86 percent in February. Short term rates have seen a steadier rise, from 1.34 percent in August to 1.84 percent in December to 2.18 percent in February.
COMMERCIAL REAL ESTATE FUNDAMENTALS
Rents and vacancies have been relatively steady. During the fourth quarter, professionally managed apartment properties saw vacancy rates hold steady at 4.5 percent and asking rents increase by 4.2 percent from Q4 2016, compared to a 4.0 percent rise a year earlier. (The Census Bureau's vacancy measure of all multifamily properties showed a vacancy rate increase from 7.8 percent at the end of 2016 to 8.3 percent at the end of 2017).
Among office properties, vacancy rates rose from 9.9 percent at the end of 2016 to 10.0 percent at the end of 2017. Asking rents increase by 1.8 percent from Q4 2016, compared to a 2.3 percent rise a year earlier. For retail, vacancy rates rose from 16.2 percent at the end of 2016 to 16.4 percent at the end of 2017. Asking rents increase by 1.8 percent from Q4 2016, the same rise as a year earlier.
Construction appears to have largely plateaued. The value of new construction put-in-place fell between January 2016 and January 2017 for multifamily, office and manufacturing properties, while it increased for commercial, lodging and health care. Across all these properties types, that value of new construction activity is down one percent from twelve months earlier and roughly even with levels seen before the Great Recession. Multifamily housing units were started at a seasonally adjusted average rate of 350,000 during the fourth quarter, with permitting running at a 414,000 unit pace. The 600,000 multifamily units under construction maintains a development inventory that hasn't been seen since the mid-1970s.
SALES AND PRICES
Across the major property types, sales volume in Q4 2017 was seven percent lower than during Q4 2016. Sales of apartment properties, at $151 billion, were down 7 percent; office properties, at $132 billion, were down 8 percent; and sales of retail properties, at $63 billion, were down 18 percent. Only industrial properties, at $72 billion, saw an increase, of 20 percent.
Capitalization rates were mixed over the year. Average cap rates fell for apartment (from 5.7 percent to 5.6 percent) and industrial properties (6.9 percent to 6.7 percent), held steady for retail (6.5 percent) and suburban office properties (6.9 percent) and rose for CBD office (5.5 percent to 5.7 percent) and hotel properties (8.5 percent to 8.8 percent).
Measures of commercial property prices were mixed. Real Capital Analytics reported a 1.3 percent increase in property values during the quarter, while the National Council of Real Estate Investment Fiduciaries (NCREIF) reported a 0.7 percent decline, and Green Street Advisors reported a one percent decline.
Based on the preliminary numbers, 2017 was a record year for borrowing and lending backed by commercial real estate properties. The increase was driven by multifamily lending, particularly for Fannie Mae and Freddie Mac, coupled with overall growth in originations for commercial mortgage-backed securities and other capital sources. Entering 2018, there continues to be strong interest to lend by just about every major capital source.
Commercial and multifamily mortgage originations were up 15 percent for the full year 2017 over 2016. Data for the fourth quarter of 2017 shows a 9 percent increase in originations over the third quarter, and a 10 percent increase compared to the fourth quarter of 2016.
An increase in originations for hotel, multifamily, and office properties led the overall increase in commercial/multifamily lending volumes when compared to the fourth quarter of 2016. The fourth quarter saw a 40 percent year-over-year increase in the dollar volume of loans for hotel properties, a 16 percent increase for multifamily properties, a seven percent increase for office properties, a 17 percent decrease for industrial properties, a 36 percent decrease in health care property loans, and a 40 percent decrease in retail property loans.
Among investor types, the dollar volume of loans originated for Commercial Mortgage Backed Securities (CMBS) increased by 27 percent year-over-year. There was a 17 percent year-over-year increase for Government Sponsored Enterprises (GSEs - Fannie Mae and Freddie Mac) loans, a 4 percent decrease in life insurance company loans, and a 5 percent decrease in the dollar volume of commercial bank portfolio loans.
MORTGAGE DEBT OUTSTANDING
Commercial and multifamily mortgage debt outstanding continued to grow in 2017, albeit at a slightly slower rate than overall property values. Even so, 2017 marked the strongest year for mortgage debt growth since 2007, with Fannie Mae, Freddie Mac and FHA leading the market, followed by banks, life companies and real estate investment trusts. The commercial mortgage-backed securities (CMBS) market, which saw a decline for the year as a whole, turned a corner and added $9 billion during the fourth quarter.
In the fourth quarter of 2017, agency and GSE portfolios and MBS saw the largest increase in dollar terms in their holdings of commercial/multifamily mortgage debt - an increase of $33.0 billion, or 5.8 percent. Life insurance companies increased their holdings by $13.6 billion, or 3.0 percent, and commercial banks increased their holdings by $12.4 billion, or 1.0 percent. Finance companies saw the largest decrease at $268 million, or down 0.9 percent. In percentage terms, agency and GSE portfolios and MBS saw the largest increase in their holdings of commercial/multifamily mortgages, an increase of 5.8 percent. Finance companies saw their holdings decrease 0.9 percent.
The $41.6 billion increase in multifamily mortgage debt outstanding between the third and fourth quarters of 2017 represents a 3.4 percent increase. In dollar terms, agency and GSE portfolios and MBS saw the largest increase in their holdings of multifamily mortgage debt, an increase of $33.0 billion, or 5.8 percent. Commercial banks increased their holdings of multifamily mortgage debt by $3.7 billion, or 0.9 percent. State and local government increased by $2.0 million, or 2.1 percent. Finance companies saw the largest decline in their holdings of multifamily mortgage debt, by $42 million, or down 0.6 percent.
Commercial and multifamily mortgages ended 2017 continuing to perform extraordinarily well. The market tailwinds of strong fundamentals, increasing property values and ready access to mortgage and other credit all put downward pressure on delinquency rates.
Based on the unpaid principal balance (UPB) of loans, delinquency rates for each group at the end of the fourth quarter were as follows:
• Banks and thrifts (90 or more days delinquent or in non-accrual): 0.51 percent, a decrease of 0.02 percentage points from the third quarter of 2017;
• Life company portfolios (60 or more days delinquent): 0.03 percent, an increase of 0.01 percentage points from the third quarter of 2017;
• Fannie Mae (60 or more days delinquent): 0.11 percent, an increase of 0.08 percentage points from the third quarter of 2017;
• Freddie Mac (60 or more days delinquent): 0.02 percent, unchanged from the third quarter of 2017;
• CMBS (30 or more days delinquent or in REO): 4.08 percent, a decrease of 0.52 percentage points from the third quarter of 2017.