MBA commercial/multifamily real estate finance forecast predicts...
By Jamie Woodwell, Reggie Booker
November 9, 2018
Three times each year, MBA publishes its best thinking about how the next two years will shape up for commercial and multifamily real estate finance (CREF) markets. MBA's CREF Forecast focuses on mortgage originations volumes and the level of mortgage debt outstanding, and implicit in it are expectations about property transaction volumes and property values.
Data covering many aspects of the commercial real estate finance market go back just over a decade - not very long when one is trying to model market behavior. MBA's series on mortgage bankers' originations, the best data available, started in 2005. Our series on total levels of mortgage debt outstanding begins in 2007. Our loan maturity volumes data didn't launch until 2009. And we're not alone. Real Capital Analytics' sales transaction series started in 2001, as did many of the widely used commercial property price indices, series on rents and vacancies and other major gauges of CRE activity.
The relative youth of these series means that we have a solid view of the market through only one significant cycle. And that cycle -- the boom of the mid-2000s, followed by the crash of 2008 to 2010, and the slow and steady renaissance of the 2010s -- may not be much of a model for future behavior. For better or for worse, in trying to understand and forecast mortgage originations, the period before, during and after the Global Financial Crisis provides the only real model we currently have.
It does provide some important insights.
First, mortgage originations and property sales volumes seem to move in near lockstep. Not all mortgage originations are driven by property sales. The fixed-term nature of many commercial mortgages means that refinances are a healthy part of the market. Similarly, not all sales transactions volume results in mortgage originations - with limits on leverage, entity level debt and all-equity deals creating a gap. Even so, if one charts Real Capital Analytics sales volumes along with MBA's mortgage originations, the lines are nearly identical.
Second, sales activity appears closely linked to property prices and changes in property prices. During the period from 2001 to the present, property prices and changes in them have been tightly correlated with sales activity. It is understandable why. First, higher property values beget higher transaction volumes partly by the simple fact that as prices rise, so does the size of each transaction. But part of the relationship also likely comes from "animal spirits" driving both property prices and transactions either forward or back in concert. Rising prices bring out activity. Falling prices provoke more of a "duck-and-cover" market temperament.
A third observation from the period, and a counterintuitive one, is that mortgage maturities do not appear to be a significant driver of mortgage originations. This may stem from the fact that during this period other factors were so significant as to drown the effect of maturities, but between 2009 and the present, a rise in maturities has tended to match a decline in originations, and vice versa.
Putting all this together with MBA's economic forecast, MBA expects mortgage originations to generally plateau in the coming years, at record or near record levels. We haven't seen the markets behave that way in the limited history of data we have, but that may say just as much about how extraordinary the past ten years have been as it would about what's ahead of us.
MBA's commercial/multifamily members can download a copy of our latest CREF Forecast at: https://www.mba.org/news-research-and-resources/research-and-economics/commercial/-multifamily-research.