SPECIAL REPORT: MBA Makes Predictions for Economy, Interest Rates, Unemployment, Commercial Real Estate

Commercial real estate market conditions are not likely to ever return to levels last seen at the peak of the market in 2007, according to Jay Brinkmann, chief economist and senior vice president of research and economics for the Mortgage Bankers Association (MBA).

Las Vegas–Commercial real estate market conditions are not likely to ever return to levels last seen at the peak of the market in 2007, according to Jay Brinkmann, chief economist and senior vice president of research and econ

omics for the Mortgage Bankers Association (MBA).

Brinkmann spoke at a general session at MBA’s Commercial Real Estate Finance/Multifamily Housing Convention and Expo held this week in Las Vegas.

The mid-point of the last decade was “anything but normal,” said Brinkmann. He said the U.S. economy at that time was one that was “artificially stimulated.” For example, consumers withdrew more than $250 million per quarter as equity from homes. “We will not get back to that point,” he said.

Jamie Woodwell, vice president, commercial/multifamily research at MBA, joined Brinkmann in the fo

recast presentation.

The MBA forecasts real GDP growth to be 2.7 percent in the first quarter, 2.3 percent in the second quarter, 2.7 percent in the third quarter and 3.2 percent in the fourth quarter. Nevertheless, unemployment—an important

indicator for commercial real estate and multifamily—will be slow to recover in this business cycle notwithstanding economic growth.

The good news on the employment front is that new claims for unemployment insurance have been declining for most of 2009, said Brinkmann. He expects that trend to continue through 2010. By the end of this year, the

unemployment claims level will likely be at pre-recession levels, Brinkmann said.

The falling unemployment insurance claims rate means that consumers who have jobs now will be more confident that they will not lose them and will be more confident to spend, he said.

The bad news, however, is that the percentage of those who have been unemployed for more than six months

has hit a record 40 percent—the highest level ever seen since records were kept in 1951. In past recessions, the highest percentage of long-term unemployed was only 25 percent.

Unemployment always takes longer to recover than economic development, said Brinkmann. Given that 2.7 m

illion jobs have been lost since the trough of this recession, it is likely to take nine quarters for that level to be replenished, he said.

Brinkmann forecasts that it is “highly unlikely” the Federal Reserve will increase the Federal Funds rate before December and early 2011—unless it needs to jump in to defend the dollar. Otherwise, there is no evidence of inflation and there is still a flight to quality among investors.

The MBA forecasts that the 10-year Treasury interest rate will increase through 2010, from 3.9 percent in th

e first quarter to 4.2 percent by the end of the year. Absent of new bank crises, LIBOR spreads should remain near current levels, said Brinkmann.

Woodwell noted that commercial real estate including multifamily has been hit across the board with nega

tive absorption rates, increased vacancy rates and downward pressure on rents.

Retail demand was affected the most in terms of vacancy rate increases, he said, with apartments not impacted as much as other sectors. Downward pressure on rents was felt most immediately in the hotel and apartm

ent sector, with office and retail lagging in rent declines, Woodwell noted.

He said the longer lease structures of office and retail should help blunt the immediate effects of the recession on those sectors, but conversely also make them the last to recover.

Property sales volume is down 86 percent from the peak. Commercial real estate prices rose 82 percent between the fourth quarter of 2001 and their peak in the second quarter of 2007, Woodwell noted. They have fallen 42 percent since that peak.

Woodwell pointed out that overall mortgage delinquencies are only now approaching the levels last seen in the recession of the late-1980s, early-1990s. He also noted that unlike other types of loans, credit card loans, commercial real estate and multifamily loans produce income and are backed by hard assets. Therefore, their charge offs tend to be least compared to loans in other industries.