CRE Mortgage Financing Ends 2018 Strong
By Reggie Booker; Jamie Woodwell
March 31, 2019
The U.S. Economy slowed its pace slightly at the end of 2018. During the fourth quarter, real gross domestic product (GDP) grew at a seasonally adjusted annual rate of 2.2 percent - below the 2.9 percent growth for the year as a whole. The job market remained strong and tight. During the fourth quarter, job growth averaged 233,000 per month (higher than the 223,000 monthly average for the year as a whole), and the unemployment rate ended the year at 3.9 percent. Wages have been increasing, with average hourly earnings ending 2018 3.3 percent higher than a year earlier. The number of households also grew - with 1.5 million households added during the year and the net increase driven by growth in owner-occupied households.
Average national vacancy rates generally ticked up during 2018, as did asking rents. Apartment vacancy rates rose from 4.6 percent in Q4 2017 to 4.9 percent in Q4 2018, and rents rose 5 percent. For office properties, vacancy rates increased from 16.4 percent to 16.7 percent and rents rose 2.6 percent. Among retail properties vacancy rates rose from 10.0 percent to 10.2 percent and rents were up 1.6 percent.
New construction activity remained robust, with increases in the value of construction put-in-place for multifamily, office, and lodging properties. The value of other commercial properties put-in-place declined from a year earlier. Multifamily permits and starts remained strong, and the number of multifamily units under construction ended the year at 601,000 - a level that has been relatively stable since mid-2016 and remains higher than other periods going back to the mid-1970s.
Commercial and multifamily property sales transactions rose in 2018, with $484 billion of sales of office, apartment, retail and industrial properties - a 14 percent increase from 2017. The increase was driven by a rise in entity-level transactions, which pushed industrial property sales up 25 percent and retail properties up 32 percent. Sales of apartment properties increased 12 percent and office transactions rose 1 percent.
Property prices also increased during the year - by 1.9 percent according to the Green Street Advisors CPPI, 6.0 percent according to the Real Capital Analytics CPPI and 9.8 percent according to the NCREIF TBI.
Cap rates remained a key contributor to the continued value increases, falling from a year earlier for apartment and office properties and holding steady for industrial and retail.
2018 ended on a strong note for commercial mortgage borrowing and lending, with fourth quarter originations 14 percent higher than a year earlier, despite the broader market volatility. Investor and lender interest in multifamily and industrial properties continues to drive transaction volumes while questions about retail and office property markets have slowed activity for those property types.
An increase in fourth quarter originations for healthcare, multifamily and industrial properties led the overall increase in commercial/multifamily lending volumes in the fourth quarter compared to the same quarter in 2017. The fourth quarter saw a 61 percent year-over-year increase in the dollar volume of loans for healthcare properties, a 32 percent increase for multifamily properties, a 28 percent increase for industrial properties, and a slight increase (one percent) for retail properties. Originations decreased for hotel property loans (4 percent) and office property loans (3 percent).
Among investor types, the dollar volume of loans originated for the Government Sponsored Enterprises (GSEs - Fannie Mae and Freddie Mac) increased year-over-year by 32 percent. There was a 22 percent increase for life insurance company loans and a five percent increase in commercial bank portfolio loans. The dollar volume of loans for Commercial Mortgage Backed Securities (CMBS) declined 35 percent.
MORTGAGE DEBT OUTSTANDING
2018 recorded the largest annual increase in commercial and multifamily mortgage debt outstanding since the Great Recession, and the largest increase in multifamily mortgage debt on record. Growth in multifamily mortgage debt made up almost half the total increase in debt outstanding, and Fannie Mae, Freddie Mac and FHA collectively accounted for two-thirds of the multifamily growth. The GSEs, life insurance companies, the CMBS market and banks all increased their holdings of commercial and multifamily mortgage debt during the year.
Commercial/multifamily mortgage debt outstanding ended 2018 at $3.4 trillion -- $216 billion (6.8 percent) higher than at the end of 2017. Total mortgage debt outstanding in the final three months of 2018 rose by 2.1 percent ($68.5 billion) compared to the previous quarter, with all four major investor groups increasing their holdings. Multifamily mortgage debt grew $32.2 billion (2.4 percent) to $1.36 trillion over the same period.
In the fourth quarter of 2018, agency and GSE portfolios and MBS saw the largest rise in dollar terms in their holdings of commercial/multifamily mortgage debt, with an increase of $26.8 billion (4.1 percent). Commercial banks increased their holdings by $21.0 billion (1.6 percent), and life insurance companies increased their holdings by $12.4 billion (2.5 percent), and state and local governments saw the largest decrease at $1.2 billion (1.1 percent).
It's hard to imagine commercial and multifamily mortgages performing much better than they have recently. Future performance will be largely driven by changes in the economy and how they affect property incomes, property values and the ability of owners to refinance when their loans come due. Currently, all of those factors are favorable.
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): 0.48 percent, unchanged from the third quarter of 2018;
• Life company portfolios (60 or more days delinquent): 0.05 percent, an increase of 0.01 percentage points from the third quarter of 2018;
• Fannie Mae (60 or more days delinquent): 0.06 percent, a decrease of 0.01 percentage points from the third quarter of 2018;
• Freddie Mac (60 or more days delinquent): 0.01 percent, unchanged from the third quarter of 2018; and
• CMBS (30 or more days delinquent or in REO): 2.77 percent, a decrease of 0.28 percentage points from the third quarter of 2018.
Download MBA's CREF Quarterly Data Book at: https://www.mba.org/news-research-and-resources/research-and-economics/commercial/-multifamily-research/commercial/multifamily-quarterly-databook.