John Adams’ enduring words, “Facts are stubborn things,” hold true in the commercial real estate sector. Recent data reveals a stark decline in mortgage originations, down by half from the previous year. Jamie Woodwell, head of commercial real estate research at the Mortgage Bankers Association, emphasizes the importance of analyzing the three pillars of CRE – space, equity, and debt – to comprehend its performance.
He noted that trends began a year ago with strong sales and mortgage originations in the first half of 2022, but in mid-year, markets cooled significantly. By year-end, sales and originations had dropped by over half from the previous year, and this trend continued into the current year.
He explained the three-pillar approach to analyze the situation. Firstly, the space market, encompassing office, apartment, retail, and industrial spaces, influences rents, vacancies, and property conditions. Secondly, the equity market depends on investor returns from various investments, affecting rates, property values, and sales. Lastly, the capital-intensive nature of commercial real estate is tied to the debt market, involving interest rates and debt availability. Recent significant changes in all three markets have resulted in a transaction bottleneck due to uncertainty and alterations in the industry.
Despite challenges, the MBA’s annual multifamily lending report highlighted positive aspects. In 2022, 2,242 multifamily lenders provided $480.1 billion in mortgages for buildings with five or more units, a mere 1% decline from 2021. Multifamily borrowing remained strong, driven by bank lending, though caution is warranted in the current year due to tightened bank standards and weakened borrower demand. The MBA’s report relies on surveys of major multifamily lenders and Home Mortgage Disclosure Act (HMDA) data, with the top five lenders in 2022 including JP Morgan Chase & Co., Walker & Dunlop, Berkadia, Wells Fargo, and Capital One Financial Corp.
The descent continues as the MBA forecasts a 38% drop in total commercial and multifamily mortgage borrowing and lending to $504 billion this year, with multifamily lending expected to decrease by the same percentage to $299 billion. However, there’s hope for a rebound to $856 billion in total commercial real estate lending by 2024. These challenges stem from uncertainty, driven by fluctuating interest rates and property value concerns. The MBA’s baseline forecast anticipates interest rate moderation in the next year and a half, potentially easing the transaction slowdown and benefiting financing costs and property valuations. If this positive outlook holds, investors may eagerly await 2024.