2020 Q4 Quarterly Databook
By Jamie Woodwell; Reggie Booker
March 31, 2021
The US economy continued to rebound during the fourth quarter of 2020 but did so at a slower pace than Q3 of 2020 or what is expected to be recorded in Q1 2021. Real GDP grew at a seasonally adjusted annual rate of 4.1 percent in Q4 2020, versus the 33.4 percent seen in Q3 2020 and the expected 4.7 percent for Q1 2021. Firms added 1.7 million jobs in July, 1.6 million in August and 700,000 in September of last year, but just 680,000 in October, 264,000 in November and a net loss of 300,000 in December. Job growth turned positive again in January (+166,000) and February (+379,000), but there remain almost 10 million fewer jobs than prior to the pandemic - which is both a sign of the lingering economic impact and of the potential for further, rapid economic growth. Three-and-a-half millions of those still-lost jobs are in leisure and hospitality alone, an area that could see rapid growth as the year progresses.
MBA anticipates strong economic growth in the second half of this year, driven by expanded vaccinations, strong household balance sheets, active federal stimulus and pent-up demand.
COMMERCIAL REAL ESTATE FUNDAMENTALS
The pandemic has had a range of impacts on commercial property operating fundamentals, many of which won't be fully understood until later. One thing that is known is that different property types have been affected in very different ways. Hotel and retail properties were the most immediately and dramatically affected by the downturn. Apartment fundamentals have generally held up well, but with some markets - particularly those that have seen more office closures and strong apartment construction deliveries - reporting increased vacancy rates and declining asking rents. Office remains one of the most heavily debated property types, with some observers expecting work-from-home to play a significant role in the future and others anticipating a broad-based return to the office. Long office lease terms have muted some of the impacts in the near term and may be a significant factor in the sector's total pandemic experience.
The uncertainty across property types led to a drop in new construction activity - except multifamily. Overall the value of commercial real estate-related construction put-in-place in December 2020 was 2.5 percent lower than a year earlier, with declines of 23 percent for lodging, 15 percent for manufacturing, 8 percent for commercial (which includes retail) and 4 percent for office. The value of multifamily construction put-in-place was 17 percent higher than year earlier.
PROPERTY SALES AND VALUES
After major drops in the second and third quarters of 2020, commercial property sales activity picked up in the fourth quarter, driven by multifamily and industrial properties. Sales of the four major property types fell from $123 billion in Q2 2019 to $45 billion in Q2 2020, and from $142 billion in Q3 2019 to $65 billion in Q3 2020, drops of 63% and 54% respectively. Those declines were felt across property types. In the fourth quarter of 2020, sales of multifamily and industrial properties were roughly equal to their levels from a year earlier, while sales were down 33 percent for office and 42 percent for retail properties.
As investors attempt to look through the pandemic to what might be on the other side, capitalization rates have generally declined during the pandemic to compensate for what are expected to be, for many properties, temporary declines in NOIs. Cap rates ended 2020 at 6.6 percent (versus 6.7 percent a year earlier) for office properties, 6.5 percent (versus 6.7 percent a year earlier) for retail properties, 6.0 percent (versus 6.0 percent a year earlier) for industrial properties and 5.1 percent (versus 5.3 percent a year earlier) for office properties.
The impact of the pandemic on property values depends very much on which price index one chooses to look to. The Green Street Advisors CPPI, generally more aligned with REIT valuations and public real estate markets, shows an 8.1 percent decline in commercial property values between December 2019 and December 2020, while the Real Capital Markets price index shows a 5.9 percent increase in values.
The last three months of 2020 were stronger than earlier quarters for borrowing backed by commercial and multifamily properties. Commercial mortgage loan originations during last year's fourth quarter were 18% lower than a year earlier, but up significantly from the very low third quarter. Borrowing and lending remain weakest for the property types most impacted by the pandemic - particularly hotel and retail buildings. Multifamily, led by government-backed financing from FHA, Freddie Mac and Fannie Mae, continued to see the strongest commercial mortgage activity.
A decrease in originations for hotel, retail, office, and health care properties led the overall decline in commercial/multifamily lending volumes when compared to the fourth quarter of 2019. There was a 79 percent year-over-year decrease in the dollar volume of loans for hotel properties, a 72 percent decrease for retail properties, a 56 percent decrease for office properties, and a 12 percent decrease for health care properties. Industrial property loan originations increased 15 percent, and multifamily property lending rose 14 percent.
Among investor types, the dollar volume of loans originated for Commercial Mortgage-Backed Securities (CMBS) declined by 64 percent year-over-year. There was a 40 percent decrease for commercial bank portfolio loans, a 33 percent decrease in life insurance company loans, and an 84 percent increase in the dollar volume of Government Sponsored Enterprises (GSEs - Fannie Mae and Freddie Mac) loans.
On February 9, MBA released an update to its commercial real estate finance forecast. The steep declines in mortgage borrowing and lending seen in 2020 should partially reverse in 2021. The economic rebound MBA anticipates in the second half of the year should bring greater stability to the markets, but with continued differentiation by property type. Much of the path forward will depend on the virus and our confidence and ability to move past it. Commercial and multifamily mortgage bankers are expected to close $486 billion of loans backed by income-producing properties in 2021, an 11 percent increase from 2020's estimated volume of $440 billion.
Total multifamily lending alone, which includes some loans made by small and midsize banks not captured in the overall total, is forecast to rise to $323 billion in 2021 - a 7 percent increase from last year's estimated total of $302 billion. MBA anticipates additional increases in lending volumes in 2022, with activity rising to $539 billion in commercial/multifamily mortgage bankers originations and $358 billion in total multifamily lending.
According to a set of commercial/multifamily real estate finance league tables released by MBA on March 17, the following firms were the top commercial/multifamily mortgage originators in 2020: JLL, CBRE, KeyBank, Meridian Capital Group, Walker & Dunlop, JP Morgan Chase & Company, Wells Fargo, Eastdil Secured, Berkadia, Newmark.
By dollar volume, the top five originators for third parties in 2020 were: JLL, CBRE, Meridian Capital Group, Walker & Dunlop, KeyBank. The top five lenders in 2020 were: KeyBank, Wells Fargo, JP Morgan Chase & Company, Walker & Dunlop, Berkadia. Nine different companies were at the top of the 11 lists reporting total originations by investor groups:
MORTGAGE DEBT OUTSTANDING
Despite a fall-off in borrowing and lending during 2020, the total amount of commercial and multifamily mortgage debt outstanding increased during the year. Continuing the trend of previous quarters, growth in multifamily mortgage debt outpaced other property types, with increases in federally backed mortgages from Fannie Mae, Freddie Mac, and FHA driving that growth. Strong appetites from all the major capital sources should keep growth going in 2021, but with key differences across property types.
The level of commercial/multifamily mortgage debt outstanding at the end of 2020 was $212 billion or 5.8 percent higher than at the end of 2019. Total mortgage debt outstanding in the final three months of 2020 rose by 1.5 percent ($58.2 billion) compared to last year's third quarter, with all four major investor groups increasing their holdings. Multifamily mortgage debt grew by $41.8 billion (2.5 percent) to $1.69 trillion during the fourth quarter, and by $127.9 billion (8.2 percent) for the entire year.
In the fourth quarter of 2020, 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 $40.2 billion (5.0 percent). Commercial banks increased their holdings by $7.0 billion (0.5 percent), CMBS, CDO and other ABS issues increased their holdings by $4.7 billion (0.9 percent), and life insurance companies increased their holdings by $3.0 billion (0.5 percent).
The $41.8 billion rise in multifamily mortgage debt outstanding between the third and fourth quarters of 2020 represented a 2.5 percent increase. In dollar terms, agency and GSE portfolios and MBS saw the largest increase, at $40.2 billion (5.0 percent), in their holdings of multifamily mortgage debt. Commercial banks increased their holdings of multifamily mortgage debt by $1.4 billion (0.3 percent). State and local government increased holdings by 0.9 percent to $992 million. CMBS, CDO, and other ABS issues saw the largest decline (1.7 percent) in their holdings, by $893 million.
Commercial and multifamily mortgage maturities among non-banks lenders are the highest since at least 2009. Many life company, GSE and FHA loans that would have been coming due this year were instead refinanced or prepaid early. Those declines have been more than made up for by shorter-term loans with 2021 maturity dates made by CMBS and investor-driven lenders. The COVID-19 pandemic has also marginally affected the level of maturities this year. As of the end of 2020, 1.5 percent of the balance of outstanding commercial and multifamily mortgages had already matured but remained outstanding. By contrast, that figure stood at 0.8% at the end of 2019, with the increase most likely driven by loans that faced challenges being refinanced given the COVID-19 pandemic. Between 2009 and 2012 the comparable figure ranged from 2.25% and 2.75%.
On February 10, MBA released its year-end ranking of commercial and multifamily mortgage servicers' volumes as of December 31, 2020.
At the top of the list of firms is Wells Fargo Bank, N.A., with $712 billion in master and primary servicing, followed by PNC Real Estate/Midland Loan Services ($668 billion), KeyBank National Association ($326 billion), Berkadia Commercial Mortgage LLC ($303 billion), and CBRE Loan Services ($264 billion).
Among servicers with retained or purchased servicing of U.S. mortgaged, income-producing properties, Wells Fargo, PNC/Midland, and KeyBank are the largest primary and master servicers for CMBS, CDO or other ABS loans; PGIM Real Estate Finance is the largest for credit company, pension funds, REITs, and investment fund loans; Wells Fargo, Walker & Dunlop, and Berkadia are the largest for Fannie Mae loans; Wells Fargo, KeyBank, and PNC are the largest for Freddie Mac loans; Lument Capital, Greystone, and Walker & Dunlop are the largest for FHA & Ginnie Mae loans; JLL, CBRE, and NorthMarq for life insurance company loans; and Wells Fargo for loans held in warehouse. PNC, CWCapital Asset Management LLC, and KeyBank are the largest named special servicers.
Wells Fargo, PNC, and MetLife Investment Management are the top servicers for loans held in own portfolio, U.S. mortgaged, income-producing properties. PNC, Berkadia, and SitusAMC are the top fee-for-service primary and master servicers of U.S. mortgaged, income producing properties; Wells Fargo, Trimont Real Estate Advisors, and KeyBank rank as the top master and primary servicers of other types of commercial real estate related-assets located in the United States; and SitusAMC, CBRE, and Mount Street are the top primary and master servicers of non-US CRE-related assets.
After a slight deterioration at the end of 2020, commercial and multifamily mortgage performance improved for the second straight month in February, bringing delinquency rates down to the lowest level since April 2020. Lodging and retail property loans continue to show the greatest stress, but the shares of outstanding loan balances that are delinquent have fallen from their peak levels by 25 percent and 28 percent, respectively. Across all property types, the share of outstanding balances becoming newly delinquent is also the lowest since the onset of the pandemic, and less than one-quarter of the level from April 2020.
The balance of commercial and multifamily mortgages that are not current decreased in February to its lowest level since April 2020.
- 94.8% of outstanding loan balances were current, up from 94.3% in January.
- 3.5% were 90+ days delinquent or in REO, down from 3.6% a month earlier.
- 0.3% were 60-90 days delinquent, unchanged from a month earlier.
- 0.6% were 30-60 days delinquent, unchanged from a month earlier.
- 0.8% were less than 30 days delinquent, down from 1.2% a month earlier.
Loans backed by lodging and retail properties continue to see the greatest stress. The overall share of lodging, retail, industrial, and office loan balances that are delinquent decreased in February.
- 20.6% of the balance of lodging loans were not current in January, down from 21.5% a month earlier.
- 10.8% of the balance of retail loan balances were delinquent, down from 11.8% a month earlier.
Non-current rates for other property types were lower during the month.
- 2.7% of the balances of industrial property loans were non-current, down from 4.0% a month earlier.
- 2.4% of the balances of office property loans were non-current, down from 3.0% a month earlier.
- 1.7% of multifamily balances were non-current, down from 1.8% a month earlier.
To download the databook, go to: www.mba.org/quarterlydatabook