No one would doubt that distress and uncertainty were the overarching themes in the world of commercial real estate finance by the end of last year, but a solid set of concrete numbers can at least provide some useful guideposts as we navigate the challenges.
After all, taking a detailed look backward can often help us predict where the market is headed.
The Mortgage Bankers Association's (MBA) recently released quarterly databook for the fourth quarter of 2009 delves into the data behind the market turmoil. Covering macroeconomic trends, results of the commercial mortgage production survey and breakdowns of debt outstanding, among other subjects, the report mixes the expected negative signs with some more promising indicators.
Overall, given the ominous ‘the worst is yet to come for commercial real estate’ sentiment that still predominates, the MBA's underlying conclusion of slowing decline may come as a surprise.
‘Many of the measures used to track commercial real estate markets continued to weaken in the fourth quarter, but the rate of deterioration was slower than in previous periods,’ the MBA says in the report's introduction. ‘Put another way, the fourth quarter of 2009 saw a significant decline in the pace of decline in key aspects of commercial real estate.’
Nevertheless, weakness in several facets of the economy continued to negatively affect the commercial real estate market, the report notes. In particular, job losses and consumer restraint contributed to the deterioration, which is visible not only in property-sector indicators, but also in performance statistics of existing commercial mortgages.
‘Delinquency rates are likely to remain under pressure until job and other economic growth returns to levels that will have a material impact on demand for commercial real estate space,’ the MBA warns.
For busy CRE finance professionals – and others in the financial services industry – who have yet to find the time to peruse this massive 102-page document, here are the essential data points, conclusions and comments from the report:
– The U.S. economy is expected to continue to recover – albeit slowly. Citing continued consumer discipline and only slightly improved credit availability, the MBA says the pace of recovery will be ‘quite moderate relative to what typically follows a deep recession.’
– Although commercial construction activity remained weak nationwide, city-by-city assessments of commercial property conditions represented a mixed bag. For instance, leasing in Dallas and San Francisco improved, and Boston and Philadelphia reported modest improvement in commercial space sales. However, overall activity weakened in Richmond, Va.; Minneapolis; Kansas City, Mo.; and elsewhere.
– Net absorption and net completion figures for the major property types – displayed graphically in the report – showed a dramatic dip between August 2008 and July 2009. Net absorption for all sectors remains in negative territory (but no longer sloping downward), while net completions appear approximately steady or slightly up since July 2009.
– Commercial loan originations were 12% higher in the fourth quarter of 2009 than in the fourth quarter of 2008, according to the MBA's statistics. Loan production increased during this time period for all property types except multifamily. Life insurance companies saw the biggest origination gain – 112%.
– In another encouraging sign, loan production was 15% higher in the fourth quarter of 2009 than in the third quarter of 2009. Over this time period, multifamily loans increased 4%, while office loans decreased 12%. Commercial bank portfolios posted the largest jump, at 39%.
– The alarming rise of delinquency rates – especially those of commercial mortgage-backed securities (CMBS) – has captured a great deal of attention lately. This concern is reflected graphically in the MBA's delinquency charts, which display upward curves from 2008 to 2009 ranging from moderate (for Freddie Mac, Fannie Mae and life company loans) to dramatic (for CMBS loans and, to a lesser degree, bank and thrift loans). However, the MBA notes, these delinquency rates are not intended to be directly comparable between investment groups due to differences in measurement methodology.
– Finally, the level of commercial/multifamily mortgage debt outstanding dropped 1.7% in the fourth quarter of 2009. The level was also $99 billion lower than at the end of 2008 – a decline of 2.8%. According to the MBA, although the $99 billion year-over-year decline was the largest nominal dollar decline ever recorded in the series, the percentage decline was still lower than the 5% decrease seen between Q2 1992 and Q2 1993.