Multifamily Spurs Commercial Real Estate’s ‘Spotty’ Comeback

The commercial real estate comeback has been spotty. Multifamily, a bright spot, has garnered much attention lately, but industry experts say office is recovering, too, and even hotels and retail look good these days.

According to the Mortgage Bankers Association's (MBA) Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations, commercial and multifamily mortgage origination volumes during the second quarter of 2013 increased 7% compared to the second quarter of 2012, and increased 36% compared to the first quarter of 2013.

This includes a 31% increase in the dollar volume of loans for multifamily properties. Loans for hotels were up 3%, while loans for retail properties were down 14%. Office and industrial remained unchanged compared to the second quarter of 2012.
Jamie Woodwell, MBA's vice president of commercial real estate research, says the multifamily market has seen much strength over the last few years, partly due to people switching from owning to renting their homes. ‘We have seen homeownership rates come down, which fostered increases in demand for rentals,’ she says. ‘Vacancies have come down, and we've seen operating incomes and property values increase, all of which helped existing mortgages as well as make financing and refinancing apartment buildings all the easier.’

MBA forecasts that originations of commercial and multifamily mortgages will grow to $254 billion in 2013, an increase of 11% over 2012, and then continue to rise to $289 billion in 2015. Originations of multifamily mortgages are forecast at $100 billion in 2013.

‘Property markets have been improving, so the commercial property businesses are in better shape to be lent to, and you see that in the delinquency numbers as well,’ Woodwell says. Also according to the Washington, D.C.-based MBA, delinquency rates for commercial and multifamily mortgage loans declined in the second quarter of 2013 among mortgages held by life insurance companies, Fannie Mae and Freddie Mac, FDIC-insured banks, and for loans held in commercial mortgage-backed securities (CMBS).

‘All the major investor groups have a healthy appetite to lend on commercial mortgages,’ Woodwell says.
More good news came from commercial real estate solutions provider Trepp LLC. Trepp's July 2013 U.S. CMBS Delinquency Report indicated that the delinquency rate for U.S. commercial real estate loans in CMBS dropped to 8.48%. This represents a 17-basis-point drop since June and a 123-basis-point improvement since the start of 2013. The report indicated that the July 2013 level is the lowest delinquency rate since September 2010.

Joe McBride, a research analyst at New York-based Trepp, notes that during the recession, multifamily fared well compared to other segments. ‘Everything was negatively affected, but with multifamily, there were always going to be renters out there,’ he says. Multifamily improved from a 15.69% delinquency rate a year ago to 11.27% in July. McBride notes that rate would be even lower if the total did not include the $3 billion loan on Stuyvesant Town, a large apartment complex in New York. That loan has been in default for three years.

Retail has improved from a delinquency rate of 8.03% a year ago to 7.02% in July 2013, and office improved from 10.69% to 9.51%. ‘Office and retail that were delinquent are disposed, so they are getting moved out of the equation,’ McBride explains. ‘The improved economy is a big factor, and you are cleaning out the distressed pipeline through sales of buildings or refinancing.’

Mark Stapp, executive director of Arizona State University's W. P. Carey School of Business Master of Real Estate Development program, points to another reason for the multifamily comeback. ‘So much time passed where no new inventory was added, so there was high demand with not as much supply,’ he says. ‘So, multifamily became one segment of the market garnering the most attention from capital because you could support the borrowing with rental income.’
He adds that office is coming back – but other factors are affecting that segment. The employment rate is improving, but the way employers supply their workers with office space has changed. ‘We shrunk to 170 square feet per employee, down from 250 square feet,’ he says. ‘The reason for this is technology. We have shrunk the equipment and we are now looking at storage solutions that don't involve storing things on site, such as cloud computing.’

The hotel space is improving, too, says Brian Stoffers, chief operating officer and president of CBRE capital markets. ‘Hotels are like apartments but can move their rents up nightly, so incomes can go up very quickly as the economy goes up,’ he says. ‘There is more trading in hotels going on, so they are selling; as they sell, they are financed.’

Stoffers adds that every product category is performing well, but lenders are still cautious. ‘Lenders are generally happy as far as mortgages are concerned,’ he says. ‘We are not looking at frothy lending. Now it's rational lending.’

Nora Caley is a Denver-based freelance writer.


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