MBA SPECIAL REPORT: Commercial Real Estate Market Operating at Peak Levels

On several key metrics, the commercial real estate industry is operating at peak levels and breaking all-time records even as the U.S. economic recovery is gathering steam.

By Keat Foong, Executive Editor

San Diego—On several key metrics, the commercial real estate industry is operating at peak levels and breaking all-time records even as the U.S. economic recovery is gathering steam. Economists expressed their optimism for 2015 during the Mortgage Bankers Association’s (MBA) Commercial Real Estate Finance/Multifamily Housing Convention & Expo.

This is an “extraordinary time,” commented Jamie Woodwell, MBA vice president, Commercial Real Estate Research, during a press briefing.

Woodwell pointed out that the Census apartment vacancy rate, currently 7.7 percent, has been lower only in 1984, when it was 7.5 percent. The present commercial and multifamily property cap rate of 6.5 percent based on data from Real Capital Analytics was last seen in 2007, while the average multifamily cap rate of 5.9 percent is an all-time low.

At the same time, the $389 billion in mortgage bankers originations last year is close to the $406 billion originated in 2006. And the total multifamily mortgage originations volume of $190 billion, and total commercial property mortgage debt outstanding of $2.6 trillion, are new records.

MBA forecasts that commercial and multifamily mortgages will increase 7 percent to $414 billion this year, and rise a further 4 percent to $430 billion in 2016. Multifamily mortgages originated by mortgage bankers are forecasted to total $152 billion in 2015.

“Commercial and multifamily real estate finance markets are strong,” stated Woodwell. He said both borrowing and lending activity this year should be boosted by rising property values, improving property fundamentals, low interest rates and higher loan maturity volumes.

“We are pretty optimistic,” said Michael Fratantoni, MBA chief economist and senior vice president, Research and Industry Technology. MBA forecasts that GDP growth will be about 3 percent in 2015. “It is not firing on all cylinders,” but the economy is “doing pretty well,” commented Fratantoni.

MBA forecasts GDP growth will increase from 2.6 percent in 2014 to 2.8 percent this year, and 2.5 percent in 2016.

Fratantoni forecasted a strengthening employment picture, with the first signs of wage growth. Consumer spending remains a “major source” of economic growth, he said. He predicted job creation will continue to average about 200,000 or more per month, and said that the official unemployment rate should drop to 5.5 percent by the end of the year. “We are beginning to see some wage growth,” which is what economists have been eagerly waiting for, he commented.

Although the U.S. economy shows strength, increasing weakness in the European and Japanese economies and slowing GDP increase in China will put a damper on any interest rate increases by the Fed this year, predicted Fratantoni. He said concern about European economies have now spread to the core European countries, with France having experienced a downgrade, and the Germany economy no longer expanding.

Frantatoni expects the Federal Reserve to increase short-term rates by June, with a small possibility that the rate increase will be pushed up to September if jobs numbers are weaker than expected. The MBA expects the 10-year Treasury rate to edge up from 2.5 percent in 2014 to an average of 2.6 percent in 2015, and an average of 3.3 percent in 2016.

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