Quarterly Data Book -- Q2 2019
By Reggie Booker; Jamie Woodwell
September 30, 2019
Real gross domestic product grew at a seasonally adjusted annual rate of 2.0 percent during the second quarter, with consumer expenditures growing at a rate of 4.7 percent. The job market remained tight, with seasonally adjusted job growth averaging 155,000 jobs per month in the second quarter. The unemployment rate began the quarter at 3.6 percent - the lowest level in 50 years - and rose to 3.7 percent.
Interest rates fell and flattened during the quarter - with the 10-year Treasury yield averaging 2.53% in April, 2.40% in May, 2.07% in June, 2.06% in July and 1.63% in August.
Commercial property fundamentals remained relatively stable during the second quarter. Compared to a year earlier, vacancy rates held steady for apartment properties at 4.7 percent, rose from 10.6 percent to 10.8 percent for office properties and fell from 10.2 percent to 10.1 percent for retail properties. Over the same period, asking rents grew by 4.3 percent for apartments, 2.1 percent for offices and 1.7 percent for retail properties.
The National Council of Real Estate Investment Fiduciaries (NCREIF) reported net operating incomes rose 4.7 percent over the last year - led by increases among apartment (+7.7%) and industrial (+8.9%) properties. Office property NOIs increased 4.4% over the year and retail NOIs decreased 0.4%.
The construction market remains active, with the value of construction put-in-place in July running 0.5 percent lower than a year earlier - driven by a decline in construction of new retail and similar properties. The value of new multifamily properties put-in-place rose 6 percent, offices rose 7 percent and lodging rose 8 percent. The number of multifamily units under construction in August (617,000) was the highest since 1974.
PROPERTY SALES AND VALUES
Compared to the same period a year earlier, sales of commercial and multifamily properties were relatively flat in the first half of 2019, but with significant variations between property types. Sales of apartment properties rose 11 percent and office property sales rose 8 percent. Sales of industrial properties - coming off a very strong 2018 - fell 14 percent and of retail properties dropped 25 percent.
Commercial property values have continued to climb. The National Council of Real Estate Investment Fiduciaries (NCREIF) transaction-based price index rose 5.7 percent during the quarter and the Real Capital Analytics Commercial Property Price Index rose 2.1 percent. Price increases were driven by growth in values among industrial properties (up 13% over the last year), apartments (up 7%), office (up 2%) and retail (up 2%).
Capitalization rates were relatively stable in the second quarter. Cap rates fell 10 basis points over the previous year (to 5.5%), were stable for industrial (6.4%), and rose 10 basis points for office (to 6.8%) and 20 basis points for retail (to 6.7%).
Falling long-term interest rates and sustained strength in commercial real estate markets lifted commercial and multifamily mortgage originations during the second quarter. Originations for life insurance companies and for Fannie Mae and Freddie Mac continued at record paces during the first half of the year, as did originations of loans backed by multifamily and industrial properties.
Commercial and multifamily mortgage loan originations were 10 percent higher compared to a year ago, and rose 29 percent from the first quarter of 2019. A rise in originations for health care, office, industrial and multifamily properties led the overall second quarter increase in lending volumes when compared to the second quarter of 2018, including a 151 percent year-over-year increase in the dollar volume of loans for health care properties, a 23 percent increase for office properties, a 16 percent increase for industrial properties and a 15 percent increase for multifamily properties. Retail property loan originations fell 32 percent, and hotel property lending decreased 28 percent.
Among investor types, the dollar volume of loans originated for Government Sponsored Enterprises (GSEs - Fannie Mae and Freddie Mac) increased by 19 percent year-over-year, and 17 percent for commercial bank portfolio loans. There was a 4 percent decrease in life insurance company loans, and a 15 percent decrease in the dollar volume of Commercial Mortgage Backed Securities (CMBS) loans.
With rates even lower during the third quarter, absent a major economic disruption, 2019 is shaping up to be another record year for commercial mortgage lending.
MBA conducted a special study of life company capacity to do additional multifamily lending and found that life insurance companies have an appetite to increase their multifamily lending volumes by approximately $10 billion in 2020, compared to 2018 volumes. In terms of portfolio holdings, surveyed life companies indicated that they have a desire to hold between $50 billion and $120 billion more in loans backed by multifamily properties on their balance sheets over the next five years. The $10 billion in additional multifamily lending they seek would correspond to an over 30 percent increase in their multifamily lending volumes, and account for roughly 3 percent of the total multifamily lending market, based on 2018 figures.
MBA also updated its forecast of commercial and multifamily mortgage originations and projects that commercial and multifamily mortgage bankers will close a record $652 billion of loans backed by income-producing properties this year, 14 percent higher than last year's record volume ($574 billion).
Total multifamily lending, which includes some loans made by small and midsize banks not captured in the overall total, is forecast to rise to $359 billion, which is also a record and is 6 percent higher than last year's record total ($339 billion). We anticipate volumes will rise again in 2020, reaching $700 billion of commercial/multifamily mortgage bankers originations, and $390 billion of total multifamily lending.
MORTGAGE DEBT OUTSTANDING
Strong borrowing and lending, coupled with relatively low levels of loan maturities, are helping to boost the amount of commercial and multifamily mortgage debt outstanding. All four major capital sources increased their holdings during the quarter.
The level of commercial/multifamily mortgage debt outstanding rose by $51.9 billion (1.5 percent) in the second quarter to $3.50 trillion. Multifamily mortgage debt alone increased $24.4 billion (1.7 percent) to $1.5 trillion from the first quarter. Commercial banks saw the largest gains in dollar terms in their holdings of commercial/multifamily mortgage debt - an increase of $22.4 billion (1.7 percent). Agency and GSE portfolios and MBS increased their holdings by $15.9 billion (2.3 percent), life insurance companies increased their holdings by $7.4 billion (1.4 percent), and CMBS, CDO and other ABS issues increased their holdings by $4.8 billion (1.0 percent).
With strong demand expected to continue, debt levels are likely to climb even more and end the year at a new high.
The strong economy, low interest rates, and liquid finance markets are all contributing to delinquency rates that are at or near record lows for commercial and multifamily mortgage loans. Despite uncertainty on many economic fronts, it is hard to identify factors that would dramatically change the delinquency rate picture in the near term.
Based on the unpaid principal balance (UPB) of loans, delinquency rates for each group at the end of the second quarter were as follows:
- Banks and thrifts (90 or more days delinquent or in non-accrual): 0.46 percent, a decrease of 0.02 percentage points from the first quarter;
- Life company portfolios (60 or more days delinquent): 0.04 percent, unchanged from the first quarter;
- Fannie Mae (60 or more days delinquent): 0.05 percent, a decrease of 0.02 percentage points from the first quarter;
- Freddie Mac (60 or more days delinquent): 0.03 percent, unchanged from the first quarter; and
- CMBS (30 or more days delinquent or in REO): 2.46 percent, a decrease of 0.15 percentage points from the first quarter.
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: https://www.mba.org/news-research-and-resources/research-and-economics/commercial/-multifamily-research/commercial/multifamily-quarterly-databook.