NEW ORLEANS—Commercial and multifamily loans continue to perform well, with delinquencies falling and originations up last year compared to 2012. “Clearly, we’re seeing broad improvement in loan performance,” said Jamie Woodwell, VP of commercial real estate research with the Mortgage Bankers Association, here at the MBA Commercial/Multifamily Servicing and Technology Conference.
Woodwell said life companies and Fannie Mae and Freddie Mac weathered the Great Recession with “very low” delinquency levels. “The delinquency rate now for apartment loans at life companies is zero,” he added. “Look at bank delinquency rates; they’re getting to low levels. They also didn’t get very high compared to the late 1980s and early 1990s. And multifamily loans held on bank’s balance sheets had the lowest charge-off rates of any type of loans.”
In addition, Woodwell said commercial mortgage-backed securities, with the exception of REO loans, perform similarly to bank loans. “The economy has been driving a lot of what we see,” Woodwell said. “Fundamentals are improving in the economy, which flows through to the capital markets, which then flows through to commercial real estate.”
Of course, different property types perform differently, Woodwell said. “You’ve seen increased demand for retail and office; that’s pushed vacancy rates down a smidge. But multifamily is definitely the ‘belle of the ball’ in terms of property types. You’ve seen apartment vacancy rates really zing in and stay tight.” This means that apartment owners can raise asking rents, he added. “Yes, owners have gotten some traction and have been able to raise rates some.”
Though net operating income acceleration has slowed a bit, it remains in the 6% range. “That’s nothing to scoff at,” Woodwell said. “But it’s no longer in the 9% range that we have seen.”
Woodwell said yields that investors demand to invest in commercial real estate remain low, close to those last seen in 2006 and 2007. “But yields across the investment spectrum”—including real estate and other investments that compete for investor dollars—“are much lower than 2006 and 2007 yields,” he said. “The premium that investors are getting to invest in a commercial property today is a good number of basis points above the ‘risk-free rate’—the 10-year Treasury note.”
In ’06 and ’07, said Woodwell, “we saw a very slim margin. So investors are getting more of a pick-up today to invest in commercial real estate than they did in ‘06 and ‘07.”
Discussing commercial property prices, different data sources give different answers, Woodwell said, joking that “the nice thing about standards is that there are so many to choose from.” For example, Green Street Advisors reported that current property prices exceed their prior peak by 10%. Moody’s and Real Capital Analytics said prices will need to increase an additional 8% to reach their ‘07 summit, while the National Council of Real Estate Investment Fiduciaries reported that its sample of prime commercial real estate assets sat just 4% shy of its peak.
“But the general story with property prices has been very positive,” Woodwell said. “It varies by locations and type, of course. Primary markets came out strong. Secondary and tertiary markets are starting to catch up, but still lagging.”
As always, when markets improve, developers start to build, Woodwell said. “Multifamily has seen construction come back fastest and strongest,” he said. “Other sectors are coming back, but remain well below their long-term average.” He said the late 1990s saw 300,000 new apartment units delivered annually, keeping apartment supply steady with obsolete or demolished units. But during the Great Recession, apartment deliveries dropped to just 52,000. “It’s now bounced back to 300,000 per year, which is a pretty good pace to be at in terms of national construction,” he said.
Woodwell said the US saw $358 billion in commercial and multifamily originations last year, up 47% from 2012, “so we’re seeing good, strong growth,” he said. “CMBS saw $80 billion of origination activity last year, not nearly the $230 billion we saw during the peak but not the ‘zero’ that we saw in 2009.”
In addition, Fannie and Freddie saw their second-strongest years on record and life companies and pension funds originated $60 billion in 2013, their strongest year ever, Woodwell said. “So, there’s definitely a strong appetite among different investors and different lenders to get money invested in commercial and multifamily mortgages.”
Reprinted with permission from MBA NewsLink and the Mortgage Bankers Association.