Commercial and multifamily mortgage originations grew in 2012, with multifamily accounting for $105 billion of $229 billion, said a Mortgage Bankers Association official at MBA’s Commercial Real Estate/Multifamily Housing Convention on Monday.
In 2011, multifamily originations accounted for $77 billion of $184 billion total, said Jamie Woodwell, vice president of commercial real estate research.
“There will be a slight pullback in 2013 and going forward to a place where multifamily fits more of its traditional size, relative to the overall market,” Woodwell said. This is a result of both available funding and the performance of multifamily fundamentals, and “we’ve seen multifamily grow as a share of total originations much faster than the commercial/multifamily market as a whole.”
Changes in homeownership account for some of the multifamily market's growth.
A drop in homeownership rates has caused new household growth and some has gone toward rental housing, causing net declines in owner occupied units, Woodwell said.
“That growth in the market has resulted in demand for multifamily," Woodwell said."We see that in low vacancy rates, improving net opportunity incomes and loan performance, the continued strength of multifamily in GSEs and life company portfolios.”
Part of the reason is a reaction to the recession, which caused households to hold off buying and having kids.
“The rental demand going forward [will depend] on the degree to which this change in demand has compressed the spring and will then see a spring back. Or, we’ll end up with just a cohort of folks in a different trajectory than the traditional trajectory,” Woodwell said.
Woodwell said it’s “hard to say” whether the multifamily market will continue to tighten, stay stable or return to a normal market. But for now, it’s in an “extremely strong place.”
At some point more people will come in to purchase because “credit is in better shape, interest rates are low, prices appear to have bottomed out,” Jay Brinkman, MBA’s chief economist and senior vice president of research and education, said. “We may see 2013 being more of an inflection point.”
The baby boomers changed the dynamics of the market, and the millennial generation is larger than that generation, so “we should expect the same thing,” Diana Reid, executive vice president at PNC Real Estate, said. Workforce demographics, the general population and lack of supply created demand for multifamily that still had not been satisfied at the same time that homeownership has gone down.
Loan maturity among commercial and multifamily mortgages will decline 21 percent in 2013 to $119.5 billion, eight percent of the outstanding balance, according to a release.
Multifamily mortgages coming due will stay relatively flat, Woodwell said, and will rise in 2015, '16 and '17 as 10-year loans from 2005, '06 and '07 come due. Lack of activity in originations in 2008, '09 and '10 will result in a “baby bust” in 2018, '19 and '20, he said.
“The relatively long term nature of the mortgages help the sector through the credit crunch and recession,” Woodwell said. “It will be more than 10 years before the bulk of the loans are maturing. That brings a fair amount of stability to the market through times of disruption.”
Many loans were made when prices were at a peak, incomes were strong and growing and people expected prices and incomes to continue to grow, Woodwell said.
Short-term loans made during the peak of the market matured quickly in 2011 and '12, creating a stress on the market due to the short duration, he said.
Brinkman said those challenges won’t be credit ability, but cap rates and vacancy rates and how they have changed since 2007.
Commercial mortgage debt is expected to break $2.4 trillion in 2013 and grow above $2.5 trillion by the end of 2015, Woodwell said.
Commercial and multifamily mortgage originations were up 24 percent in 2012 from 2011 and the Mortgage Bankers Association predicts they will grow to $254 billion in 2013, an increase of 11 percent, according to the MBA’s Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations. Multifamily originations are expected to be at $100 billion in 2014.
CMBS originations grew 45 percent in 2012 from 2011; banks and thrifts originations grew 51 percent; life companies remained flat; and Fannie Mae (OTC: FNMA) and Freddie Mac (OTC: FMCC) increased 43 percent, according to a release.
The fourth quarter accounted for a large part of overall originations activity, Woodwell said.
The fourth quarter marked a 49 percent increase from 2011 in commercial/multifamily lending volume, which was driven by increases in originations for hotel and office properties, according to a release.
There was a 331 percent increase in the dollar volume of loans for hotel properties, a 78 percent increase for office properties, a 49 percent increase for multifamily properties, a 46 percent increase for industrial properties, a 5 percent increase in retail property loans and a 26 percent decrease in health care loans.
With a limited number of “trophied properties” in gateway cities, Woodwell said lenders are looking beyond and putting more of an emphasis on secondary, or tertiary, markets.
“The property has been there and has had financing, but now there are more types of financing made available,” Woodwell said.
Kevin Riordan, president, CEO and director at CreXus Investment Corp., said at one of the conference’s panel discussions that in his company closed a loan in 2010 in a secondary market and no one else was around to compete.
“Over time, what has gone on, there’s been a creep of more institutions. And that turned from a creep to a herd into secondary markets,” Riordan said.
When moving into a tertiary market, Reid said the lender needs to know what he or she is doing in that market.
“The reason is that commercial real estate values and health are driven by jobs growth," Reid said. "Jobs are coming from energy, technology, education and health care. Is that community creating those kinds of jobs?”
Brinkman said he predicts GDP growth in 2013 to reach 2 percent and doesn’t expect cutbacks in spending to have the “strong, negative effect people are saying.”
He expects energy to be a major driver through the rest of the decade and unknowns to include consumer spending and consumer confidence. Business spending will be a little bit slower, Brinkman said, due to tax benefits disappearing.
The risk in 2013 may not be what the Federal Reserve’s actions are, but how they communicate to the public, he said.
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