MBA 2Q Commercial/Multifamily DataBook Reports ‘Downshift’

Commercial real estate property fundamentals generally remained strong in the second quarter, but the pace of improvement ‘downshifted’ from earlier periods, the Mortgage Bankers Association Commercial/Multifamily DataBook reported this morning.

The MBA Commercial/Multifamily DataBook summarizes major trends that developed during the quarter. Charts and tables provide historical information on commercial and multifamily real estate markets. 

“For most sectors new construction activity remains robust, but growth in the pace of new development appears to have paused,” MBA Vice President of Commercial Real Estate Research Jamie Woodwell said.

Average office vacancy rates ended the second quarter at 16 percent, flat from the first quarter and down 10 basis points from a year before. On a year-over-year basis, office rents grew at 1.6 percent compared to 3.2 percent at the same time last year. In terms of new construction activity, the value of new office construction put-in-place remained essentially flat between July 2016 and July 2017.

Average retail vacancy rates ended the quarter at 10 percent, up 10 basis points from the first quarter and 20 basis points from a year prior. On a year-over-year basis, retail rents grew at 1.7 percent compared to 2.0 percent at the same time last year. The value of new commercial construction (which includes retail) put-in-place was up 7 percent between July 2016 and July 2017.

Average apartment vacancy rates ended the quarter at 4.4 percent, up 10 basis points from the first quarter and 20 basis points from second-quarter 2016. Apartment rents grew at 3.6 percent year-over-year compared to 5.2 percent at the same time last year. Looking at new construction activity, the value of new multifamily construction put-in-place increased 3 percent between July 2016 and July 2017.

New multifamily housing units were started at a 323,000-unit seasonally adjusted annual rate in August compared to a 420,000 pace in August 2016 and units were permitted at a 464,000 rate compared to a 421,000 pace in August 2016, the DataBook reported.

The pace of property sales was seven percent slower during first-half 2017 than during the same period last year, with individual property sales down 5 percent, portfolio sales down 10 percent and entity-level transactions down 36 percent. Among property types, sales of apartment properties fell 16 percent, retail property sales were down 12 percent and office property sales fell 1 percent. The dollar volume of industrial property sales increased 12 percent.

On a year-over-year basis, property prices are up 8 percent, the Real Capital Analytics Commercial Property Price Index reported. Office prices are up 11 percent, apartment prices are up 9 percent, industrial prices are up 8 percent and retail prices are down 1 percent.

Average capitalization rates are generally flat this year, the DataBook said. Apartments ended the second quarter unchanged from year-end 2016 at 5.7 percent, retail was unchanged at 6.5 percent, office held steady at 6.6 percent and industrial cap rates fell to 6.8 percent from 6.9 percent.

“Borrowing and lending backed by commercial and multifamily properties has been strong the first half of this year,” Woodwell said. He said borrowing backed by industrial properties increased by two-thirds compared to first-half 2016 while borrowing backed by retail properties dropped by one-sixth, which reflected broad industry trends. “As was the case during the first quarter, commercial/multifamily mortgage bankers’ originations increased despite a slowdown in the volume of sales transactions,” he said.

Second-quarter commercial and multifamily mortgage loan originations were 20 percent higher than the same period last year and 28 percent higher than first-quarter 2017. A rise in originations for industrial and office properties led the overall increase. The second quarter saw a 91 percent year-over-year increase in the dollar volume of loans for industrial properties, a 33 percent increase for office properties, a 21 percent increase for multifamily properties, a 14 percent increase for hotel properties, a 7 percent increase in health care property loans and a 9 percent decrease in retail property loans, the DataBook said.

The amount of commercial and multifamily mortgage debt outstanding ticked up during the second quarter, the DataBook said. Total commercial/multifamily debt outstanding rose to $3.06 trillion at the end of the quarter.

Multifamily mortgage debt outstanding rose to $1.2 trillion, up $21.7 billion or 1.8 percent, from first-quarter 2017.
“In the second quarter, banks and thrifts saw the largest increase in dollar terms in their holdings of commercial/multifamily mortgage debt,” Woodwell said. He noted banks and thrifts increased their holdings by 2.0 percent or $24.7 billion. Agency and GSE portfolios and mortgage-backed securities increased their holdings 2.5 percent or $13.4 billion and life insurance companies increased their holdings 2.9 percent or $12.7 billion.

The balance of loans in commercial mortgage-backed securities saw the largest decrease at $10.4 billion, or down 2.4 percent–with more loans paying off and paying down than new loans being originated, the DataBook reported.

“This may be one of the last quarters of that long-term trend, as the ten-year loans that were made in 2006 and 2007 have now almost all matured and there are relatively few CMBS maturities during the remainder of 2017 and 2018,” Woodwell said. CMBS balances declined by more than $20 billion during the first quarter and by $10 billion this quarter.

Loans backed by commercial and multifamily properties continue to perform extremely well, the DataBook reported. For most lender types including banks, life insurance companies, Fannie Mae and Freddie Mac, delinquency rates are at or near record lows. The commercial mortgage-backed securities market is the only outlier. “As more loans pay off, the denominator of the delinquency rate is shrinking faster than the numerator, pushing the rate upward,” Woodwell said. “We expect that situation to reverse in coming quarters.”