For commercial real estate (CRE) markets, a key factor in how we work through this period of uncertainty will be how investors value properties and their incomes. Our experiences in the past two recessions may provide some insights.
As we've said before, the bad news is that there is a great deal of uncertainty about how the virus will play out in the US, how we will react publicly and privately and what the impact will be on the economy. The good news is that the economy and commercial real estate markets are entering this period from a position of considerable strength.
Last week, the week of February 24, 2020, financial markets recognized that the Coronavirus has arrived in the United States. Prior to that, most articles and analyst reports that discussed the economic impact of the virus focused on declines in foreign demand for US goods, or disruptions to international supply chains. With community-spread cases detected in the US, that focus began to turn inward.
Low mortgage rates, strong property price appreciation and a larger multifamily debt market. Will we see more of the same in 2020?
After a slow start in 2019, the commercial mortgage-backed securities (CMBS) market ended strong, with $39.1 billion of private-label CMBS issuance during the fourth quarter - more than double the $18.8 billion issued during the fourth quarter of 2018. Overall, CMBS issuance in 2019 came in at $97.8 billion, 27 percent higher than 2018 and the strongest year since 2007.
Commercial and multifamily real estate markets got a shot in the arm from low interest rates in 2019. In addition to making mortgage borrowing less expensive, lower yields on a broad array of investment options are buoying the values of industrial, apartment, office, retail and other income-producing properties.
Given how low cap rates are, even a small change in terms of basis points could mean a significant change in value.
Given the current economic uncertainty, it's fair to assume that different paths for the US economy could lead to very different outcomes for commercial and multifamily mortgage demand and supply.
The low interest rate environment, coupled with still strong demand for commercial and multifamily assets, has pushed property values higher and increased demand for mortgages. At the beginning of the year, many economists, investors and others anticipated long-terms rates would currently be in the 3 percent range and rising - potentially putting pressure on property values and decreasing demand for debt. Instead, the 10-year Treasury yield is at approximately 1.5 percent, and many market participants are planning for rates to remain ‘lower for longer.' The result is heightened demand and higher volumes.
Jamie Woodwell, Vice President of Research and Economics at Mortgage Bankers Association (MBA), joined the RealCrowd Podcast to discuss what an inverted yield curve means for real estate
Commercial real estate values are a function of a property's income and the capitalization (cap) rate. Essentially the inverse of a price-to-earnings ratio, cap rates are a gauge of the yield investors demand to put their money into commercial real estate - with a lower cap rate demonstrating higher investor interest in each dollar of current income.
On July 10 and 11, in association with NYU Schack Institute of Real Estate and sponsored by DBRS, MBA hosted its third annual CREF Market Intelligence Symposium. The Symposium has become an important forum for commercial and multifamily real estate finance leaders and analysts to come together, hear from leading researchers and discuss key risks (and opportunities) facing the industry.