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MBA Testifies on Commercial Real Estate Market at Congressional Hearing

Feb 04, 2011

Jamie Woodwell, vice president of commercial/multifamily research for the Mortgage Bankers Association (MBA), testified before the Congressional Oversight Panel at a hearing titled, "Commercial Real Estate's Impact on Bank Stability." The following is Woodwell's oral statement before the panel, as prepared for delivery: "Thank you for the opportunity to discuss the Mortgage Bankers Association's research on conditions and trends in commercial real estate and commercial real estate finance. "In my testimony, I would like to cover three general areas. The first is to correct some myths that have taken hold in discussions about commercial real estate. The second is to highlight current conditions and trends in commercial real estate markets. The third is to note some key factors that will affect commercial real estate markets going forward. "An important point of clarification is to ensure that we are speaking of the same thing when we say 'commercial real estate.' When industry professionals speak about commercial real estate and commercial mortgages, they are speaking about office buildings, apartment buildings, shopping malls, warehouses and other properties that lease out space in exchange for rental payments. This income-producing property market is generally distinct from two other markets that are sometimes folded into conversations, particularly in discussing bank lending - owner-occupied commercial real estate and construction loans. "Neither owner-occupied commercial properties nor single-family construction lending are closely tied to the core commercial real estate markets, but many recent discussions and conclusions have grouped them. These distinctions are a key reason for some of the confusion about commercial real estate and how commercial mortgages have been performing in recent quarters. "Before discussing the state of commercial real estate markets, I think it is important to clear up a few myths that have taken hold in discussions about commercial real estate. The first is that banks are being excessively weighed down by their mortgages on commercial and multifamily properties, and the second is that there has been a looming wave of loan maturities threatening the system. "As of the third quarter, bank and thrift delinquency rates for commercial and multifamily mortgages remained lower than the average for their overall books of business, and commercial and multifamily mortgages continued to have the lowest charge-off rates among any major loan type. "To put these numbers in context, since 2006, banks and thrifts have charged off $132 billion of single-family mortgages, $127 billion of credit card loans, $72 billion of commercial and industrial loans, $66 billion of construction loans and $53 billion of other loans to individuals, but just $27 billion of commercial and multifamily mortgages. "A second myth I'd like to address is that there has been a looming wave of commercial and multifamily loan maturities weighing on the market. "On Monday, MBA will release its third annual study detailing the scheduled loan maturities of $1.4 trillion of commercial and multifamily mortgages held by non-bank lenders. What these studies have shown is that—with a typical loan term of ten years—most investor groups' commercial/multifamily mortgage maturities are spread over a relatively long period. This is in direct contrast to other forms of credit, such as credit card debt, in which the entire outstanding balance rolls every month, and commercial paper, in which nearly the entire market matures every 80-days and less. "Let me now turn briefly to current commercial real estate conditions and trends, which continue to exhibit the influences of the broader economy. "During the third quarter, the economy began to show (modest) growth and the absorption of commercial space picked up in the face of little new space coming on line. The impact has been marginal declines in vacancy rates and a firming of asking rents. Property sales and originations volumes have picked up, but have not been high enough to keep up with the mortgage debt that investors have seen paying off and paying down. "Looking ahead, the most significant factor in the performance of commercial real estate markets will be the performance of the broader economy. Vacancy rates at commercial properties rose as jobs were lost, as consumers pulled back in spending and as household growth contracted. Economic growth is needed to reverse this trend. "Commercial real estate finance markets will be driven by property incomes, values and interest rates, and where the markets are when loans come due, relative to where they were when the loans were made. To the degree future incomes, values and rates support refinancing existing debt, loans will mature and roll-over. To the degree they do not, the existing equity, mezzanine debt and, as a last resort, first lien mortgages will be resized to fit the future capital stack. "The Great Recession has strained commercial real estate markets, as it has strained nearly every part of the US economy. The long-term nature of the market, in the form of relatively long leases and borrowing terms, however, has helped moderate the recession's impact. "Thank you for the opportunity to discuss these issues with you today." For more information, visit
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