MBA 3Q Commercial/Multifamily DataBook Reports ‘Strong, Steady’ Markets

Commercial real estate and finance markets were strong and steady during the third quarter, with fundamentals holding tight, prices still climbing, finance activity growing and loan performance extremely strong, the Mortgage Bankers Association said.

But a slowdown in sales transactions warrants attention as a potential symptom of a broader “downshift” in the pace of growth, the MBA third-quarter 2017 Commercial/Multifamily DataBook said. The report summarizes major trends that developed during the quarter.

The U.S. economy continues to grow, with both the second and third quarters recording seasonally adjusted annual real GDP growth rates above three percent, the report said. This growth further tightened the labor market. The economy added 228,000 jobs in November and the unemployment rate held steady at a low 4.1 percent.

“Commercial real estate fundamentals generally remained stable during the quarter, with steady office and retail markets showing little change in vacancies and moderate increases in asking rents and tight apartment markets continuing to–on average–drive rents higher,” the report said.

Among professionally managed properties, office vacancy rates averaged 16.1 percent during the quarter, flat from a year earlier. That stable occupancy led to a 1.2 percent year-over-year increase in rents. Retail property vacancy rates averaged 10 percent during the quarter and rents rose 1.3 percent year-over-year rent increase–the same rate seen a year earlier. Apartment vacancy rates rose to 4.5 percent during the quarter compared to 4.1 percent rate one year prior. The still-tight market drove a 3.4 percent asking rent increase, close to the 3.5 percent increase seen one year earlier. A broader measure of multifamily rental vacancy rates form the Census Bureau showed a 9.4 percent vacancy rate during the third quarter, up from 9.0 percent during the second.

“New construction activity has stabilized for many property types,” the report said. “The value of construction put-in-place is largely holding at or near cyclical peaks for office, commercial (which includes retail) and multifamily properties. Lodging construction continues to trend upward, as does health care. Multifamily building permits, starts and the number of units under construction are all holding at high levels.”

Commercial property sales activity through the first nine months of the year was 5 percent lower than the same period in 2016, with four of the five major property types seeing declines. Compared to the same period in 2016, the sales pace through September was 20 percent lower for hotels, 19 percent lower for retail, 9 percent lower for apartment and 6 percent lower for office properties. Only industrial saw a pick-up in activity, by 23 percent.

In contrast, property prices have continued to grow. As of October, property prices for industrial and multifamily properties were both up an average 10 percent compared to a year earlier. Prices of central business district office, suburban office and hotel properties were all 5 percent higher and retail prices were 2 percent higher. Averaged across all property types, prices in September were 7 percent higher than a year earlier, the report said.

Borrowing and lending associated with commercial and multifamily real estate increased again in the third quarter, even as sales transaction volume slowed, the DataBook said. “Most property types and capital sources saw stronger lending activity than a year earlier, supported by solid property fundamentals and continued property value appreciation.”

Among investor types, the dollar volume of loans originated for commercial mortgage-backed securities loans increased by 42 percent year-over-year. There was a 22 percent year-over-year increase for government-sponsored enterprise (Fannie Mae and Freddie Mac) loans, a 21 percent increase in dollar volume of commercial bank portfolio loans and a 2 percent decrease in life insurance company loans, the report said.

Over the first three quarters, borrowing and lending backed by industrial properties rose 49 percent compared to the first nine months of 2016, ,the report said. Healthcare loans rose 43 percent, hotel loans rose 20 percent, multifamily loans rose 17 percent, office loans rose 14 percent and retail loans declined 13 percent.

“The third quarter marked a significant turning point for the CMBS market,” the DataBook said. “With only a few exceptions the balance of commercial and multifamily mortgages held in CMBS has declined each quarter since 2008. That years-long trend ended this quarter.”

With the so-called CMBS ‘wall of maturities’ behind us and a “vibrant” market for new originations, once again more new loans are being originated for CMBS than old loans paying off and paying down, the report said. The result is the largest increase in outstanding CMBS mortgages since the end of 2007.

“It is hard to imagine commercial and multifamily mortgages performing better than they are today,” MBA said. “The delinquency rate for loans held in bank portfolios matches the lowest ever recorded in the 24-year history of the series.” Loans made by life companies, Freddie Mac and Fannie Mae have 60-plus day delinquency rates of 0.02 percent, 0.02 percent and 0.03 percent, respectively. “Strong property fundamentals and values, and ready credit availability, are all helping contribute to this extraordinary performance.”