First Quarter Maintains Momentum

By Reggie Booker; Jamie Woodwell
June 30, 2019

Data Book

2019 Q1 Data Book

The US economy grew at a seasonally adjusted annual rate of 3.1 percent during the first quarter - continuing a ten-year expansion that is setting records. Employers added an average of 174,000 jobs per month during Q1, helping drive the unemployment rate to a fifty-year low (3.6 percent). After another strong showing in April (+224,000) job growth slowed in May (+75,000). The tight labor market is helping push wages higher, with average hourly earnings rising 3.1 percent between May 2018 and May 2019. Even so, inflation has remained low as the prices of all items less food and energy have grown by 2.0 percent over the same period.

Retail sales grew by 2.7 percent between Q1 2018 and Q1 2019, down from 4.7 percent a year earlier. Growth was driven by ecommerce sales, which increased by 12.4 percent compared to a 1.7 percent increase for other sales, including those through brick & mortar locations. E-commerce now accounts for 10.1 percent of retail sales.

One-and-half million households were added to the US during the previous 12 months - 1.1 million owner-occupied households and 458,000 renter households. Interest rates legged down - with the ten-year Treasury averaging 2.71 percent in January, 2.68 percent in February and 2.57 percent in March. At the end of June, signaling unease about future economic growth, the rate stood at 2.0 percent.

Both vacancy rates and asking rents have ticked up, with apartment rents leading the pack. Multifamily vacancy rates of 4.8 percent in the first quarter were 10 basis points higher than a year earlier, while asking rents grew by 4.5 percent. Office vacancy rates also grew by 10 basis points from a year earlier, to 16.6 percent, while asking rents increased by 2.2 percent. Among retail properties vacancy rates grew by 20 basis points, to 10.2 percent, and rents increased by 1.6 percent.

New construction activity remains relatively robust. The value of new construction of selected commercial real estate types has held steady at a seasonally adjusted annual rate of roughly $350 billion - 3 percent higher than one year earlier. Over the last year, construction has grown for multifamily (+7.9%), office (+8.4%) and manufacturing (+11.5%) space, and declined for commercial/retail (-8.5%) space. Nearly 600,000 multifamily units are currently under construction and the number of permits and starts remains strong.

First quarter sales of the four major property types were 9 percent lower than during last year's first quarter, with sales of office, industrial and retail properties each down between 14 and 16 percent. Sales of apartment properties were roughly flat to last year.

Commercial property price indices told different stories during the first quarter - with the Green Street Advisors index increasing by 0.4 percent during the quarter, the Real Capital Analytics index rising by 1.8 percent and the NCREIF transaction based index dropping by 4.2 percent.

Capitalization rates have held relatively steady for most property types. First quarter average cap rates of 6.4 percent for industrial, 6.5 percent for retail and 6.6 percent for office all match the rates from one year earlier. The Q1 cap rate of 5.4 percent for multifamily properties was 20 basis points below where it had been during the first quarter of 2018.

The momentum seen in 2018's record year of borrowing and lending continued in the first quarter of this year. First quarter volumes were higher for nearly every property type, and double-digit growth in loan volume for Fannie Mae and Freddie Mac led the increase among capital sources. Low interest rates and strong property values continue to make commercial real estate an attractive market for borrowers.

Compared to a year earlier, a rise in originations for industrial, health care and hotel properties led the overall increase in commercial/multifamily lending volumes. By property type, industrial (73 percent), health care (41 percent), hotels (14 percent), retail (9 percent) and multifamily (9 percent) all saw year-over-year gains by dollar volume. The dollar volume of office property loans was unchanged.

Among investor types, the dollar volume of loans originated for Government Sponsored Enterprises (GSEs - Fannie Mae and Freddie Mac) increased by 14 percent year-over-year. Life insurance company loans increased 7 percent, commercial bank portfolios increased 6 percent, while loans originated for Commercial Mortgage Backed Securities (CMBS) decreased 4 percent.

Mortgage debt backed by commercial and multifamily income-producing properties continues to grow at a strong pace, with three of the four major capital sources - banks, life companies, and the GSEs and FHA - growing their holdings by more than one percent during the first quarter of 2019. REITs, finance companies and nonfinancial corporate businesses also showed strong appetites last quarter, with each growing their holdings by more than $1 billion. The depth and breadth of growth among investors signals the interest in the sector.

Total commercial/multifamily debt outstanding climbed to $3.46 trillion at the end of the first three months of the year. Multifamily mortgage debt alone increased $17.9 billion (1.3 percent) to $1.4 trillion from the fourth quarter of 2018.

Commercial banks continue to hold the largest share (39 percent) of commercial/multifamily mortgages at $1.4 trillion. Agency and GSE portfolios and MBS are the second largest holders of commercial and multifamily mortgages (20 percent) at $687 billion. Life insurance companies hold $532 billion (15 percent), and CMBS, CDO and other ABS issues hold $466 billion (14 percent). Many life insurance companies, banks and the GSEs purchase and hold CMBS, CDO and other ABS issues. These loans appear in the report in the "CMBS, CDO and other ABS" category.

Looking solely at multifamily mortgages, agency and GSE portfolios and MBS hold the largest share of total multifamily debt outstanding at $687 billion (50 percent), followed by banks and thrifts with $436 billion (32 percent), state and local governments with $84 billion (6 percent), life insurance companies with $84 billion (6 percent), and CMBS, CDO and other ABS issues holding $43 billion (3 percent). Nonfarm non-corporate businesses hold $16 billion (1 percent).

Steady U.S. economic growth continues to support the financing and values of commercial and multifamily properties. Commercial/multifamily mortgage delinquencies remain at or near record lows for most capital sources, and it's hard to imagine loans performing better than they currently do. Given the environment, there's little reason to expect a marked deterioration of near-term performance.

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

- Banks and thrifts (90 or more days delinquent or in non-accrual): 0.48 percent, unchanged from the fourth quarter of 2018;
- Life company portfolios (60 or more days delinquent): 0.04 percent, a decrease of 0.01 percentage points from the fourth quarter of 2018;
- Fannie Mae (60 or more days delinquent): 0.07 percent, an increase of 0.01 percentage points from the fourth quarter of 2018;
- Freddie Mac (60 or more days delinquent): 0.03 percent, an increase of 0.02 percentage points from the fourth quarter of 2018; and
- CMBS (30 or more days delinquent or in REO): 2.61 percent, a decrease of 0.16 percentage points from the fourth quarter of 2018.

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