MBA 1Q Commercial/Multifamily DataBook Reports ‘Downshift’

The Mortgage Bankers Association released its first-quarter 2017 Commercial/Multifamily DataBook today.

The report summarizes major trends that developed during the quarter. Charts and tables provide historical information on commercial and multifamily real estate markets.

“Commercial and multifamily market activity has downshifted at the start of 2017,” the DataBook said. “Markets continue to move forward, but the rapid increases in property values, transaction volumes and other fundamentals that characterized the post-recession period have given way to more regular changes tied to the economy as well as changes in supply and demand. For many parts of the market.”

The U.S. economy grew at a slower pace during the first quarter–a 1.2 percent real seasonally adjusted annual rate compared to 2.1 percent growth in the fourth quarter and 3.5 percent in third-quarter 2016. The job market saw continued growth with 216,000 new jobs created in January and 232,000 in February. Job growth slowed to 50,000 in March, 174,000 in April and 138,000 in May, but the headline unemployment rate has continued downward, falling to 4.3 percent in May.

Consumer spending remains robust, the DataBook said. Household growth also picked up, with the U.S. adding 1.2 million households between Q1 2016 and Q1 2017. Bucking recent trends, roughly two-thirds of the new households were in owner-occupied housing and one-third in renter-occupied, which more closely matches the overall homeowner-renter balance.

Commercial real estate fundamentals generally improved during the first quarter, with most vacancy rates trending down and rents trending up, the DataBook reported. The already tight apartment market saw vacancy rates tick down to 4.2 percent in the first quarter (for professionally managed properties), with rents rising 3.2 percent on a year-over-year basis. Rent growth slowed from the 5.7 percent rate a year earlier as net absorption slowed to the lowest rate since 2009. The office vacancy rate remained mostly flat from a year earlier, with average rents up 1.8 percent. Retail vacancy rates fell to 9.8 percent from 9.9 percent a year earlier and average rents rose 1.6 percent year-over-year.

New construction activity continued at a strong clip, but the pace slowed, the DataBook said. Except for multifamily, the seasonally adjusted annual change in the value of new construction put in place fell between December 2016 and April 2017. Although multifamily starts have trended downward from a 449,000 seasonally adjusted annual rate in December 2016 to 284,000 in May, the 602,000 multifamily units under construction remains one of the highest levels since the mid-1970s.

Commercial and multifamily property sales activity started 2017 slowly, with first-quarter sales of major property types down 19 percent compared to Q1 2016, the DataBook said. Multifamily led the declines with sales transactions 35 percent lower than a year earlier. Sales of office properties were down 15 percent and retail was down 10 percent. Sales of industrial properties–sometimes called “the new multifamily” due to strong interest in the sector–were up three percent.

Property price growth has slowed, with different indices providing different results. The National Council of Real Estate Investment Fiduciaries property price index started 2017 with a slight decline, falling 1.7 percent in the first three months of the year, while the Moody’s/RCA CPPI increased 0.7 percent. The Green Street Advisors CPPI, which tracks values among properties owned by real estate investment trusts, fell 0.4 percent.

Capitalization rates were also mixed during the quarter, the DataBook reported. Cap rates fell for apartment properties to a new record-low 5.4 percent, held steady for office properties at 6.8 percent and rose slightly for industrial real estate to 7.0 percent and retail properties to 6.6 percent.

Commercial real estate borrowing and lending started 2017 on much the same footing it ended 2016, the Databook reported. Multifamily properties remain the key force behind overall originations trends, and the GSEs continue to drive multifamily originations. Matching broader investment themes, financing backed by industrial properties also picked up while retail declined.

The first quarter saw a 40 percent year-over-year increase in the dollar volume of loans for industrial properties, a 22 percent increase for health care properties, a 14 percent increase for multifamily properties, a 2 percent increase for office properties, a 23 percent decrease in retail property loans and a 40 percent decrease in hotel property loans, the DataBook reported.

Among capital sources, the dollar volume of loans originated for Government-Sponsored Enterprises Fannie Mae and Freddie Mac increased by 33 percent year-over-year, the Databook said. Commercial bank portfolio loans increased 11 percent, life insurance company loans were essentially flat from first-quarter 2016 and loans originated for commercial mortgage-backed securities decreased 17 percent.

The amount of commercial and multifamily mortgage debt outstanding continued to grow during the first quarter, MBA said. Nearly two-thirds of the growth came from multifamily mortgage debt outstanding increases and 80 percent of that growth came from portfolios and mortgage-backed securities held or guaranteed by federal government agencies and the GSEs.

Total commercial/multifamily debt outstanding rose to $3.01 trillion at the end of the first quarter–the first time it crossed the $3 trillion mark, MBA said. Multifamily mortgage debt outstanding rose to $1.17 trillion, up $23.4 billion or 2.0 percent from fourth-quarter 2016. More recent releases from the Federal Reserve show that bank multifamily portfolios stopped growing and remained relatively flat during the second quarter while bank holdings of other commercial property loans have continued to grow.

Delinquency rates for commercial and multifamily mortgages remained at or near record lows for most capital sources during the first quarter, the DataBook reported. Growth in property incomes and property values coupled with low interest rates have facilitated financing.

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