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Feb. 11, 2014

SPECIAL REPORT: MBA Delivers Cautious Economic Outlook for 2014

Multifamily Financing Back to 2007 Levels; 10-Year Treasury Rate of 3.3% Expected by Year-End 

By Keat Foong, Executive Editor

Orlando, Fla.—Mortgage originations for multifamily and commercial real estate in the last quarter of 2014 reached the highest volume achieved since 2007, according to the Mortgage Bankers Association (MBA). Multifamily financing, in particular, has returned to levels last witnessed at the peak of the market.

All major investor groups increased their activity in the quarter, according to MBA. Between the third and fourth quarters of 2013, loans for GSEs jumped by 48 percent, commercial bank portfolio financing spiked by 44 percent, CMBS financing increased by 35 percent, and loans for life insurance companies rose by 8 percent.

Jamie Woodwell, MBA’s vice president of commercial real estate research, projected that total multifamily/commercial mortgage originations made by mortgage bankers will total $280 billion in 2013—a 15 percent increase from 2012. This amount is close to the 11 percent increase originally forecasted.

Woodwell, who spoke at MBA’s Commercial Real Estate Finance/Multifamily Housing Convention & Expo 2014 at Orlando, Fla., forecasted that total multifamily/commercial mortgage financing volume will increase by 17 percent in 2014, to a total $300 billion. MBA forecasts the multifamily/commercial originations will rise by another 6 percent in 2015 and 5 percent in 2016, to a level of $333 billion in 2016. (By comparison, the volume of commercial/multifamily mortgage originations totaled $508 billion in 2007.)

In the fourth quarter 2013 compared to the same period in 2012, the 16 percent overall increase in commercial/multifamily lending volumes was driven by the increase in originations for health care (70 percent increase), retail (43 percent increase) and office (27 percent increase), according to MBA. Originations for multifamily properties were flat in fourth quarter 2013, while originations for hotel properties fell 9 percent, and industrial properties originations dropped by 30 percent compared to the volumes.

Overall, the commercial and multifamily financing markets have rebounded, based on a range of metrics, says Woodwell. Fannie, Freddie and FHA have all experienced their second best year, and life companies, with $63 billion in mortgage originations for multifamily/commercial properties, have enjoyed a second record year in the sector. Woodwell predicted that that CMBS issuance will probably reach $110 billion in 2014, from a forecasted $86 billion in 2013.

In the multifamily sector, financing volumes are now back to levels last seen during the market peak in 2007, Woodwell noted. Between 2005 and 2012, says Woodwell, the originations levels for multifamily have increased by one third among banks, a quarter among life companies, 100 percent on the part of Fannie Mae, 200 percent in the case of Freddie Mac, and by 400 percent for FHA-insured financing.

On the downswing since 2010, multifamily/commercial mortgage loan maturities for loans held by non-bank lenders and investors will plunge by 23 percent to a low of $91.7 billion in 2014, according to MBA. These loan maturities are set to increase substantially again, by 72 percent in 2015, and by an additional 34 percent in 2016. Some of these loans may be paid off ahead of time, however. These loan maturities will be a driver, but not a major driver, of loan originations in 2016 and 2017, Woodwell predicts.

MBA remains guarded in its forecast for the economy. Michael Fratantoni, MBA chief economist and senior vice president, forecasts that GDP, which fell from 4.1 percent in the third quarter to what MBA projects will be 2.5 percent in the fourth quarter 2013, will rise from only 2.3 percent in the first quarter of this year to 2.6 percent by the fourth quarter 2014.

Businesses are situated on the verge of greater spending on plant and equipment, but there are headwinds coming from the government sector and conditions overseas, says Fratantoni. Hiring by the federal government has continued to fall, although with housing prices on the way upwards, state and local government tax receipts may start to rise, and consequently, hiring by state and local governments.

Single-family home construction, still about 60 percent below trend, will not return to historical levels in the near future, says Fratantoni. Builders face difficulty in securing land, and consumer demand for housing is not at robust levels, he suggested. Although starts have increased, it will be “some time” before single-family home building will match levels experienced before the crisis, he says.

Woodwell says that demand for housing across the board may be muted. The relatively low level of household formation in 2013 will not boost either homeownership or rentals. The decrease in immigration levels and net migration has also led to a slowdown in population growth across the country, although there are exceptions.

Fratantoni forecasted long-term, 10-year Treasury rates would rise to 3.3 percent by year-end 2014, and to 3.5 percent by the fourth quarter of 2015. It is possible the incoming Federal Reserve Chairman Janet Yellen may be more dovish on inflation and place a greater emphasis on reducing unemployment. Nevertheless, the Fed may continue to taper on QE3 at the same pace because the feeling is that the cost of the program exceeds its benefits, suggested Fratantoni.

As far as short-term interest rates, MBA projects the U.S. unemployment rate to fall from 6.8 percent in the first quarter to 6.5 percent by year-end. The Federal Reserve has said it will not increase rates until unemployment drop to 6.5 percent, says Fratantoni. Thus, higher short-term rates will not be expected till the fourth quarter or first quarter of 2015.

Overall, the growing economy and long-term issues associated with the Federal debt may be other reasons for seeing higher interest rates this year, says Fratantoni.

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