MBA’s Woodwell: CRE Prospering Despite Economic Uncertainty
DALLAS–Commercial real estate remains healthy despite an uncertain economy, Mortgage Bankers Association Vice President of Commercial Real Estate Research Jamie Woodwell said here at the MBA Commercial/Multifamily Servicing and Technology Conference.
“Maybe it’s always extraordinary in some way, but this is definitely an extraordinary time,” Woodwell said. “Look at cap rates–the return investors demand to invest in commercial real estate–they fell to 6.3 percent. They’ve never been that low. Cap rates for apartments fell to 5.7 percent, also their lowest ever.”
Prices are going “gangbusters,” Woodwell said. “Cap rates are at their absolute lows for most property types. When investors look at what their yield is going to be, they compare that to other options, especially the 10-year Treasury. The spread you’ll get for investing in real estate over Treasuries is actually at a pretty good level.”
Additionally, Woodwell said, the Federal Reserve has been trying to push up asset values. “We are seeing that play out in commercial real estate,” he said.
Despite the optimism, Woodwell said, some are sounding a more cautious note. “Some say we’ll see a recession around the corner, others look at the fundamentals and think it’s a pretty strong economy out there,” he said. “[Billionaire real estate investor] Sam Zell leans to the pessimistic side while a host of others agree with Warren Buffett’s more optimistic outlook.”
The first quarter was a “tough one,” Woodwell noted. “That sets up a question about where exactly the economy is right now.”
Woodwell noted that apartment units under construction recently reached 549,000, a figure not seen since the 1970s, he said. apartment vacancies fell to just 7.4 percent nationwide, the lowest level since 1984. “It’s just an incredibly tight rental housing market,” he said.
CRE transactions continue to move through the pipeline, Woodwell said, with CRE transaction volume at nearly the same level as the 2007 peak–$460 billion in 2015, close to 2007’s $461 billion. Commercial and multifamily mortgage bankers closed $503.8 billion of loans in 2015, second only to 2007’s peak of market.
“We’ll see an increase in originations going forward driven by some placid cap rates and growth in the sector as a whole,” Woodwell said. “Of course, an awful lot of this depends on where the economy goes and where interest rates go, so take it with the appropriate grain of salt. But looking at history, we should be seeing an increase in interest rates. Wage growth is coming back, oil prices are already down and with growth in the labor markets, interest rates will likely go up from here.”
