CRE Markets Stable in Q3

By Jamie Woodwell; Reggie Booker
December 24, 2018

Data Book

The US economy showed strength in the first three quarters of 2018. Real gross domestic product increased at seasonally adjusted annual rates of 2.2 percent in the first quarter, 4.2 percent in the second and 3.4 percent in the third. The tax cuts passed last year have been a key contributor, helping drive fixed investment up 8 percent in the first quarter, 6.4 percent in the second and 1.1 percent in the third. Personal consumption expenditures increased 3.8 percent in the second quarter and 3.5 percent in the third.

The overall economic strength has further tightened the job market. The unemployment rate fell to 3.7 percent in September and has held steady at that level through November. Job growth has been varied but strong, with 165,000 jobs added in July, 286,000 in August, 119,000 in September, 237,000 in October and 155,000 in November. The number of job openings remains near all-time highs - with 7.1 million open positions in October, accounting for 4.5 percent of all positions.

Commercial real estate fundamentals were largely stable during the third quarter. Vacancy rates were unchanged from the second quarter for office (16.6 percent vacancy rate) and retail (10.2 percent vacancy rate) properties. The vacancy rate for apartments rose from 4.7 percent to 4.8 percent. Vacancy rates for each of the three property types were 20 basis points above where they had been a year earlier.

Rents rose as well, and were 1.7 percent higher than a year earlier for retail properties, 2.5 percent higher for office properties and 4.5 percent higher for apartment properties.

The value of selected commercial-real-estate-related private construction put-in-place increased in October and was faster than the pace of construction a year earlier. The $345.8 billion seasonally adjusted annual rate in October was 0.5 percent higher than in September, and 5.6 percent higher than the October 2017 pace.

Multifamily construction has largely plateaued, with roughly 600,000 units under construction during October, a level that has held steady since August 2016.

Commercial property sales volumes were 11 percent higher during the first three quarters of 2018 than during the same period in 2017. The increase was driven by an 86 percent rise in the volume of "entity-level" transactions. Sales of individual properties increased 8 percent and the volume of portfolios changing hands increased 3 percent. Entity-level transactions drove a 31 percent increase in the volume of retail property sales. Sales of apartments rose 12 percent and industrial rose 17 percent. There was a 4 percent decline in office property sales activity.

Property prices rose as well. The NCREIF TBI rose by 4.7 percent during the quarter, the Real Capital Analytics Commercial Property Price Index by 2.3 percent and the Green Street Advisors CPPI by less than one percent.

Low and generally falling capitalization rates continued to contribute to the strong property values. During the third quarter, cap rates fell for apartments (to 5.4 percent from 5.5 percent) and office properties (to 6.6 percent from 6.7 percent). They held steady at 6.5 percent for retail properties and rose (from 6.4 percent to 6.5 percent) for industrial.

Borrowing and lending backed by commercial and multifamily properties decreased 3 percent during the third quarter, and was 7 percent lower than a year ago. Rising interest rates took some wind out of the market's sails, with the 10-year Treasury yield starting the quarter at 2.87 percent and finishing at 3.05 percent, and the 2-year Treasury starting at 2.57 percent and ending at 2.81 percent. The CMBS and bank lending markets were the hardest hit. Meanwhile, lending backed by multifamily properties and for the government sponsored enterprises (GSEs) continued to grow.

Compared to a year earlier, a decline in third quarter originations for health care and retail properties led the overall decrease in commercial/multifamily borrowing volumes. By property type, there was a 55 percent year-over-year decrease in the dollar volume of loans for health care properties; a 28 percent decrease for retail properties; a 19 percent decrease for hotel properties; and a 17 percent decrease for office properties. Originations increased for loans backed by multifamily and industrial properties (each by 19 percent).

In October, MBA released its Annual Report on Multifamily Lending, detailing the apartment lending market in 2017. Strong conditions helped fuel a 6 percent increase in multifamily lending in 2017, as lenders provided a record high $285 billion in new mortgages for apartment buildings with five or more units. The market benefited from improving fundamentals, rising property values and low interest rates, and the result was larger loan sizes and record levels of overall borrowing and lending.

The top five multifamily lenders in 2017 by dollar volume were Wells Fargo, CBRE Capital Markets, Inc., JP Morgan Chase & Company, Walker & Dunlop, and Berkadia. Fifty-eight percent of the active lenders made five or fewer multifamily loans over the course of the year.

Favorable commercial real estate fundamentals and strong lender demand pulled commercial and multifamily mortgage debt outstanding to a new high. Multifamily mortgage debt continues to lead the pack - accounting for more than half of the total increase - and Fannie Mae, Freddie Mac and FHA remain the key drivers of multifamily mortgage growth. All four of the major lender groups added to the balance of loans they hold.

The level of commercial/multifamily mortgage debt outstanding rose by $45.4 billion (1.4 percent) in the third quarter of 2018 to an all-time high. Total commercial/multifamily debt outstanding rose to $3.32 trillion in the third quarter, surpassing the previous high of $3.27 trillion in this year's second quarter. Multifamily mortgage debt increased $26.1 billion (2 percent) to $1.3 trillion over the same period.

In the third quarter, Agency and GSE portfolios and MBS saw the largest gains in dollar terms in their holdings of commercial/multifamily mortgage debt - an increase of $16.7 billion, or 2.6 percent. Life insurance companies increased their holdings by $11.3 billion (2.3 percent), agency and GSE portfolios and MBS increased their holdings by $10.5 billion (0.8 percent), and CMBS, CDO and other ABS issues increased their holdings by $5.1 billion (1.1 percent).

Commercial and multifamily mortgage delinquency rates are extremely low right now. The delinquency rate for loans held on bank balance sheets set a new series low, and delinquency rates for loans held by life companies or guaranteed by Fannie Mae and Freddie Mac are all below 10 basis points. Loans held in commercial mortgage-backed securities (CMBS) have a higher "headline" delinquency rate because of the way the industry reports on those loans. However, when excluding loans in foreclosure or real estate owned (REO) - which are generally omitted from the calculations for the other groups - the CMBS delinquency rate is just 45 basis points, the same level as December 2005. (See our recent blog post at to learn more)

Based on the unpaid principal balance (UPB) of loans, delinquency rates for each group at the end of the third quarter (compared to the second quarter) were as follows:

- Banks and thrifts (90 or more days delinquent or in non-accrual): 0.48 percent, a decrease of 0.02 percentage points;
- Life company portfolios (60 or more days delinquent): 0.04 percent, an increase of 0.01 percentage points;
- Fannie Mae (60 or more days delinquent): 0.07 percent, a decrease of 0.03 percentage points;
- Freddie Mac (60 or more days delinquent): 0.01 percent (unchanged);
- CMBS (30 or more days delinquent or in REO): 3.05 percent, a decrease of 0.47 percentage points.

MBA's analysis incorporates the measures used by each individual investor group to track the performance of their loans. Because each investor group tracks delinquencies in its own way, delinquency rates are not comparable from one group to another.

Download MBA's CREF Quarterly Data Book at:

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