Quarterly Data Book -- Q3 2019
By Reggie Booker; Jamie Woodwell
December 31, 2019
The US economy continued to grow during the third quarter, even in the face of signs of an international slowdown. US gross domestic product (GDP) grew at a real seasonally adjusted annual rate of 2.1 percent during the quarter, supported by 2.9 percent growth in consumer expenditures. The job market remained tight, with a net addition of 166,000 jobs in July, 219,000 in August and 193,000 in September helping hold the unemployment rate at 3.5 percent. Retail sales grew 3.4 percent between September 2018 and September 2019, driven by growth in ecommerce. And the US added a net 1.3 million households between Q3 2018 and Q3 2019 - with all the growth coming in owner-occupied housing.
Interest rates declined significantly during Q3 - with the 10-year Treasury yield averaging 2.06 percent in July and 1.70 in September. More recently, long-term rates have held in the 1.8 percent range. Short-term rates have fallen more consistently, with the one-month Treasury averaging 2.22 percent in June, 2.15 in July, 2.07 percent in August, 1.99 percent in September, 1.73 percent in October, and 1.58 percent in November.
Commercial real estate fundamentals have been largely stable. Apartment properties continue to lead the market, with tight Q3 vacancy rates flat from a year earlier (4.7 percent) and solid year-over-year asking rent growth of 4.1 percent. At the same time, retail properties have been lagging other property types - even though retail vacancy rates declined 10 basis points to 10.1 during the last twelve months, rents grew by only 1.5 percent. Office properties sit somewhere between multifamily and retail, with vacancy rates increasing by 10 basis points over the year, to 16.8 percent, and asking rents growing by 2.6 percent.
Construction activity has generally been flat to down over the last year, but for many property types at a relatively high level. The value of construction put-in-place in October of health care (+2.4%), lodging (+1.2%) and office (+1.0%) properties were all higher than a year earlier. Construction of other commercial properties (-17.7%), which includes retail, and multifamily (-2.1%) were both down. Overall levels of construction remain relatively high - particularly in multifamily. There are currently more multifamily units under construction (600,000+) than at any time since the mid-1970s.
Third quarter property sales volumes were five percent lower than a year earlier, with every major property type except industrial recording a decline. Sales of industrial properties rose 63 percent between Q3 2018 and Q3 2019, to $41 billion, putting year-to-date industrial sales at $77.7 billion. Apartment property sales fell 7 percent, to $46 billion, with year-to-date sales at $130 billion. Sales of office properties sales also fell (by 7 percent to $41 billion), putting year-to-date sales at $99 billion. Sales of retail properties showed the largest decline, falling 55 percent between Q3 2018 and Q3 2019, to $14 billion, putting year-to-date sales at $43 billion.
Following the decline in interest rates, capitalization rates generally fell during the period, by four percent (or 30 basis points) for industrial properties and two percent (10 basis points) for multifamily properties. Cap rates held steady for office properties and increased by one percent (10 basis points) for retail properties.
Commercial real estate continues to show strong overall appreciation, with the RCA CPPI growing by 2.4 percent during the period, the NCREIF TBI growing by 2.5 percent and the Green Street Advisors CPPI by 0.5 percent.
Low interest rates are supporting strong levels of commercial and multifamily borrowing and lending. Through the third quarter, every major capital source is lending at a pace above last year's level. Loans backed by multifamily and industrial properties, and made for life companies and Fannie Mae and Freddie Mac, are all running at record paces.
Commercial and multifamily mortgage loan originations were 24 percent higher in the third quarter compared to a year ago and rose 9 percent from this year's second quarter. A rise in originations for health care, industrial, office and multifamily properties led the overall third quarter increase when compared to the third quarter of 2018. The third quarter saw a 239 percent year-over-year increase in the dollar volume of loans for health care properties, a 42 percent increase for industrial properties, a 36 percent increase for office properties, and a 16 percent increase for multifamily properties. Originations of loans backed by retail properties fell two percent, and hotel property lending decreased 20 percent.
Among investor types, the dollar volume of loans originated for commercial mortgage-backed securities (CMBS) increased by 52 percent year-over-year, commercial bank portfolio loans increased 44 percent, Government Sponsored Enterprises (GSEs - Fannie Mae and Freddie Mac) loans increased 11 percent, and life insurance company loans increased 6 percent.
The low interest rate environment should continue to support property values and encourage borrowing into 2020.
MORTGAGE DEBT OUTSTANDING
Strong property markets, low interest rates and low mortgage delinquencies continue to draw more capital to commercial and multifamily mortgages. Every major capital source increased their holdings of commercial real estate debt during the third quarter, led by Fannie Mae, Freddie Mac and FHA. The growth of investor-driven lenders is also clear, with mortgage REITs on pace to soon become the fifth largest source of capital for commercial and multifamily mortgages.
The level of commercial/multifamily mortgage debt outstanding rose by $75.7 billion (2.2 percent) in the third quarter of 2019, to $3.59 trillion at the end of the third quarter. Multifamily mortgage debt outstanding rose to $1.5 trillion, an increase of $40.6 billion, or 2.8 percent, from the second quarter of 2019.
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 $24.9 billion, (3.5 percent). Commercial banks increased their holdings by $21.2 billion (1.5 percent), life insurance companies increased their holdings by $12.9 billion (2.4 percent), and CMBS, CDO and other ABS issues increased their holdings by $9.6 billion (2.0 percent).
The $40.6 billion increase in multifamily mortgage debt outstanding from the second quarter represents a 2.8 percent increase. In dollar terms, agency and GSE portfolios and MBS saw the largest gain - $24.9 billion (3.5 percent) - in their holdings of multifamily mortgage debt. Commercial banks increased their holdings by $7.0 billion (1.6 percent), and life insurance companies increased by $3.4 billion (2.4 percent). State and local government saw the largest decline in their holdings of multifamily mortgage debt, down $605 million (0.7 percent).
Loans financing commercial and multifamily properties continue to perform very well. Delinquency rates are at or near record lows for nearly every capital source, with the rate for commercial mortgages held by banks at its lowest since the inception of the series 25 years ago. Solid property fundamentals, strong property values and low interest rates are all helping to keep delinquencies down.
Based on the unpaid principal balance (UPB) of loans, delinquency rates for each group at the end of the third quarter were as follows:
- Banks and thrifts (90 or more days delinquent or in non-accrual): 0.45 percent, a decrease of 0.01 percentage points from the second quarter;
- Life company portfolios (60 or more days delinquent): 0.03 percent, a decrease of 0.01 from the second quarter;
- Fannie Mae (60 or more days delinquent): 0.06 percent, an increase of 0.01 percentage points from the second quarter;
- Freddie Mac (60 or more days delinquent): 0.04 percent, an increase of 0.01 from the second quarter; and
- CMBS (30 or more days delinquent or in REO): 2.29 percent, a decrease of 0.17 percentage points from the second quarter.