Slowing economy begins to hit commercial real estate finance markets; credit crunch impact continuesMortgagePress.comMBA, commerical real estate, Commercial Real Estate/Multifamily Finance Quarterly Data Book, gross domestic product
The Mortgage Bankers Association (MBA) has released its
Commercial Real Estate/Multifamily Finance Quarterly Data Book for
the third quarter of 2008. The Data Book compiles comprehensive
up-to-date information on topics of interest to
commercial/multifamily real estate finance industry participants
As noted within MBA's Data Book, during the third quarter, while
continuing to feel the pressure the credit crunch,
commercial/multifamily real estate began to show signs of being
affected by the slowing of the broader economy.
"For more than a year, we have been faced with the question of
whether commercial real estate would be the next shoe to drop,"
said Jamie Woodwell, vice president of commercial real estate
research for MBA. "The weakening economy, in concert with the
ongoing credit crunch, is demonstrating that commercial/multifamily
is not entirely immune to the impacts felt by the residential
As noted within the Data Book, property fundamentals showed a
slowdown in leasing activity. Property sales and mortgage
originations showed the impact of economic uncertainty, shifting
investor expectations and the continued capital markets malaise
while mortgage investment levels were depressed by the capital
constraints of traditional investors and headline risks associated
with holding "mortgage-related" assets. All the above factors
resulted in a deterioration of commercial/multifamily mortgage
BROAD ECONOMIC ANALYSIS
According to the dominant gauge of economic growth, the annualized
percentage change in real gross real domestic product (GDP), the
U.S. economy shrank in the third quarter. The rate of decline, 0.5
percent, was relatively modest, but all expectations are that the
fourth quarter numbers will show a more significant decline. (MBA's
December economic forecast is predicting a decline of 5.2 percent
in the fourth quarter of 2008 and a further decline of 3.7 percent
in the first quarter of 2009). While the major drag on the economy
over the past two years has been the decline of the single-family
housing market, a major drop in personal consumer expenditures
pulled GDP growth 2.7 percent below where it otherwise would have
been, dwarfing the previous single-family market impacts.
Employment growth is following a similar course. Approximately
1.9 million jobs have been lost between November 2007 and November
2008. The majority of those have been goods producing jobs - led by
manufacturing and construction jobs - but recent months have seen a
surge in losses among service-producing industries. And the trend
is worsening; while 600,000 jobs were lost during the third
quarter, 533,000 jobs were lost in November alone.
The economic slowdown has begun to have an impact on demand for
commercial real estate. Despite relatively modest new construction
activity, the slowdown in job growth, retail sales and other
aspects of the economy has led to lower demand for commercial space
and to declines in net absorption of space. As a result, supply is
outpacing demand. Nationally, asking rents fell in the third
quarter for office and retail space. Rents were flat for industrial
space and up slightly for apartments and vacancy rates increased
for each of the major property types.
Not surprisingly, commercial property sales have also stalled.
On a dollar basis, commercial property sales through the first
three quarters of 2008 were 67 percent lower than for the same
period in 2007. While part of the large percentage fall off can be
attributed to the extraordinary volumes seen in the first half of
2007, sales volume in the third quarter was the lowest since 2003's
Hand-in-hand with the slowdown in transactions is a surprising
stability in reported cap rates. Cap rates for commercial
properties rose slightly in the third quarter, but not by the
levels most anticipated. A disinclination by owners to sell
properties that are still generating income and meeting debt
services is a likely reason why. But prices have been coming down.
Among the major price indices for commercial properties, all show
prices down from their peaks, although by varying degrees. The
S&P/GRA index shows prices down 2 percent from its peak, the
Moody's/REAL index is down 9 percent from its peak, and the NCREIF
TBI index is down 12 percent from its peak.
It's important to note that while commercial real estate has
been getting a great deal of attention related to the pricing
pressure it is experiencing, the price declines seen so far are
only a fraction of what's been seen in other investments, including
the prices of single-family homes, the Dow Jones Industrial Average
or the price of crude oil.
MORTGAGE DEBT OUTSTANDING
In the third quarter of 2008, for the first time since the
mid-1990s, commercial/multifamily mortgage debt outstanding
declined meaning that the volume of new originations is not keeping
pace with the rate at which mortgages are paying-off and paying
down.. The level of decline was relatively modest at -0.1percent.
The government-sponsored enterprises and Ginnie Mae increased their
holdings of multifamily mortgages by $14 billion and finance
companies and life insurance companies each increased their
holdings by $2 billion, but commercial banks and thrifts reduced
their holdings of commercial/multifamily mortgages by $9 billion
and the CMBS market decreased its holdings by $13 billion.
At the same time, stress on commercial/multifamily mortgages has
continued to rise from the historic lows of the last couple of
years. Delinquency rates remain low by historical standards, but
the pressure - from the weakening economy and the continued credit
crunch - is building. 30+ day delinquency rates on CMBS loans rose
from 0.53 percent to 0.63 percent over the third quarter and 90+
day delinquency rates for commercial/multifamily mortgages held by
banks and thrifts rose from 1.18 percent to 1.38 percent. The rise
is quite small when compared to what has been seen in single-family
and construction loans. In addition, the absolute levels, thus far,
have remained well within expectations. (Among more than 35,000
loans held by life insurance companies, only 36 were 60+ days
delinquent at the end of the third quarter). That said, the
economic and credit market stress cannot help but be felt in
commercial/multifamily mortgage performance.
"Even with the expected degradation of loan performance, the
pricing of CMBS bonds continues to puzzle most observers," added
Woodwell. "Spreads on AAA CMBS rose to levels more than 12 times
where they were just a year earlier. In recent weeks they have
regained some of that widening, but current spreads remain well
wide even of the levels seen at the end of the third quarter. No
new CMBS were issued in the third quarter, and as loans continue to
pay-down and pay-off, the overall level of CMBS outstanding
continues to drop. At the end of the quarter, $800 billion was
outstanding, compared to $821 billion at the end of 2007."
REAL ESTATE FINANCE MARKET
The slight decrease in holdings of commercial/multifamily
mortgages belies the dramatic decrease in originations activity.
The slowdown in sales transactions and refinancing volume means
that investors are not experiencing the same runoff - through
pay-downs and pay-offs - that they were a year ago. As a result,
much less new product is required to maintain an investor's level
of holdings. Even so, while mortgage debt outstanding shrank by
just 0.1 percent in the third quarter, origination volumes were 53
percent lower than last year's third quarter and 11 percent lower
than the second quarter. Originations for CMBS conduits, commercial
banks and life insurance companies all fell over the year.
Multifamily originations for Fannie Mae and Freddie Mac
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For more information, visit www.mortgagebankers.org.