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Commercial lending posts surprise uptick in Q1


The Mortgage Bankers Association released the findings of its first-quarter survey of commercial/multifamily bankers on Thursday, and it showed that commercial mortgage origination volume unexpectedly rose, compared to last year's first quarter. Jamie Woodwell, MBA's vice president of commercial real estate research, discussed the survey results with Scotsman Guide News and also why he is still holding to his projection of slightly weaker demand for commercial loans ahead. 

Given that first-quarter origination volume increased year over year, are you still projecting a decline for the entire year? And if so, why?

jamiewoodwellComparing Q1 of 2018 to Q1 of 2017, total mortgage banker originations were up by 1 percent. I take that as essentially flat, but you do see some differences by different property types and different capital sources. Looking ahead at the year as a whole, 2017 was a record year for commercial and multifamily mortgage banker originations, at $530 billion of total loans closed.  

We are anticipating that 2018 is going to be another strong year, just not quite as strong as 2017. The last couple of years we have had predominantly tailwinds for the market. This year, with rising interest rates, with a little bit of a downshift in NOI [net operating income] growth and property appreciation, we are expecting that we will have some headwinds coming up to meet some of those tailwinds. They will be pretty evenly matched, but all in all, we do think that total origination activity, borrowing and lending, will end the year a little bit down from 2017.

Which sectors are doing well in terms of transaction and borrowing activity, and which aren’t?

What you see both on the transaction side and on the lending side, the volumes are, in some ways, following some of the headlines. Multifamily has continued to be strong, continued to be a very sought-after property type from investors and lenders. We actually saw this year’s first quarter up about 18 percent [in originations], compared to last year’s first quarter for multifamily. Industrial is similarly a sought-after property type. There we saw this year’s first quarter of lending up about 14 percent, compared to last year.

And the headlines in retail are having an impact. So, with retail this year’s first-quarter, originations were down about 27 percent, compared to last year’s first quarter. When we look at last year’s total volume, retail mortgage properties accounted for about 9 percent of total commercial/multifamily mortgage originations. That is the lowest share since 2005, when we started tracking this.

How are rising interest rates affecting the commercial real estate market?

We are seeing rates ticking up. The 10-year is at 3.1 percent today. That absolutely has an impact. One thing to note over the longer term is that as we have seen rates working their way up, we have seen spreads on mortgages, on CMBS [commercial mortgage-backed securities], on corporate debt and a whole variety of instruments, those have been tending to tighten a little bit. So, the rise in interest rate has not been met one-for-one with a rise in mortgage rates. It has taken a little bit of the increase out, but rates are definitely higher today than they were a year ago.  

Does that suppress activity?

In the short term, it actually can prompt some activity. Borrowers, property owners, see rising rates and think it might be time to get into a fixed-rate loan or readjust one’s capital structure. In that case, it can prompt more borrowing than might otherwise be the case. Over the longer term, the key is how it matches up with economic growth. Rising property incomes can offset the impact of rising rates, and [when property incomes rise in tandem with rates that] will not really impact overall borrowing activity.  

It’s been widely reported that the tax overhaul was good to the commercial real estate market. Is that an indirect benefit, or were there changes that can really help the bottom line with properties?

You have got two sides to it. One is that there was some potential for harm in the tax bill that was largely avoided in the final language. Things like the deductibility of mortgage interest for commercial real estate, 10-31 exchanges [a tool that enables investors to trade properties without incurring taxes on the sale] … those came out in a way that is unlikely to cause harm and potentially it could have, if the language had gone a different way. That is one bucket.

The other bucket is that overall, both corporate and individual tax rates have come down. When one thinks about investors in commercial real estate, the after-tax income from those investments is going to be better than it was prior to the tax reform. That is a positive that could flow through to property values, the same way it would flow through to corporate stock prices and other things.   

It would seem that the real estate cycle is somewhat long in the tooth at least in years, but you have been predicting stable origination volumes and a favorable outlook for the commercial market over the next two years. Is there anything that could alter this and spark a downturn?

There are always factors, both on the upside and the downside, that could come along. Certainly investors and lenders, people involved in commercial real estate, are keeping a close eye on interest rates, keeping a close eye on new development activity, and keeping a close eye on the demand side, and economic growth. As is always the case, there are a lot of factors in play in commercial real estate that could push the markets a little bit more in either direction.

Was there anything you would like to add about the state of the commercial market?

The one other piece in the series that we track is that loan performance continues to be extremely strong. We have record low delinquency rates for commercial mortgages in a number of investor groups. Again, I think is an important part of the overall makeup of where we are right now. 


 

Questions? Contact at (425) 984-6017 or victorw@scotsmanguide.com.

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