BLOG VIEW: Where Did CRE Sector Variation Go?

Back when the recession and its effects on the commercial real estate finance industry seemed a little less all-encompassing, comparing commercial real estate sectors felt pertinent, and possibly even fun. Is industrial still holding up relatively well? Will retail fall the hardest?

Predictions from industry experts on the core property types' comparative fates were a staple of my MortgageOrb Person of the Week interviews, and tracking shifts in observer sentiment provided an interesting barometer of industry perceptions and, often, actual market directions.Â

Now, however, the stark reality of universal distress has set in. Given recent findings in the PricewaterhouseCoopers (PwC) Real Estate Investment Survey, I might not want to bother asking Person of the Week interviewees about any perceived recovery in any facet of CRE for a while.

‘Real estate investors do not expect a rebound in any of the commercial real estate sectors until well into 2010,’ the report says. Bluntly stated and not surprising.

According to Dr. Peter Linneman, chief economist at NAI Global, our current recession is now officially the second worst in history since the end of the 1960s, ranking behind only the 1973-1975 recession. Moreover, the situation is ‘worsening quickly,’ he states in a recent white paper.

No wonder commercial real estate can no longer be sensibly divided into neat categories according to the sectors' prospects for weathering the storm or recovering in the near term. ‘Property owners are faced with limiting financing options, declining tenant demand, rising overall capitalization rates and deflated confidence,’ notes the PwC report.

The survey, titled ‘Investors Struggle To Preserve Value,’ goes on to detail deteriorating data points for regional malls, power centers, central business district office markets, extended-stay hotels, and other commercial property types and subtypes.

The sea of numbers and color-coded arrows – multiplied across the numerous other industry reports out now that present varying, if generally similar, findings – makes painfully clear the fragile interconnections of the U.S. economy and, consequently, commercial real estate. On the simplest level, for instance, consumers' waning demand for goods leads not only to retail losses, but also to a dwindling manufacturing sector and decreasing demand for warehouse space, the report points out.

Meanwhile, the relentless slashing of jobs keeps on fueling the cycle. ‘Preserving asset value is very difficult at a time when the U.S. economy continues to hemorrhage jobs at a monthly pace not seen in over 60 years,’ PwC stresses.

But in contrast to the universal pall the economy casts over commercial real estate, the mortgage side of the industry still shows some definite differentiation – a point that may be lost in the mass of morose economic statistics.

So, how about some dealmaking data to accompany the property-fundamentals data? Regional product supply and demand curves can provide some useful background for commercial mortgage professionals, but where is financing actually happening?

To find out, I began combing through every deal announcement recently sent to me for possible publication in Commercial Mortgage Insight's Dealmakers section. This quick research, though far from scientific, yielded some compelling results.

For the time period examined, my inbox contained announcements of 38 recently closed loans on multifamily properties. Compare that total to the eight retail loans, five industrial loans and four office loans announced in the same span.

While no asset type can claim reasonable victory in the CRE fundamentals race anymore, we have a runaway winner of the financing contest.

Multifamily's (relative) funding prowess at the moment has been repeatedly verified both by industry groups' origination data and by the mortgage banking firms that follow up on their e-mails of recent deals by phoning my office to discuss just how fortunate they are to be involved with the Fannie Mae and Freddie Mac programs that are allowing nearly every one of those 38 multifamily deals to go forward.

The topic of whether Fannie and Freddie's indispensable propulsion of multifamily property loan funding is threatened by their looming portfolio-reduction measures mandated by the government is one we have covered before on MortgageOrb.

Nevertheless, the dealmaking data reaffirm the importance of the government-sponsored enterprises for this uniquely thriving corner of commercial real estate.

During a time of eroding differentiation between any previously ‘strong’ or ‘weak’ commercial real estate sectors, the financing side will continue to tell a notably different story, and CRE sector variation will remain a valid market assertion – as long as multifamily maintains this specialized capital channel that, thus far, has allowed its mortgage transaction activity to distance itself from the fading pack.

As always, please feel free to e-mail your thoughts to

Jessica Lillian, Commercial Mortgage Insight


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