The U.S. commercial real estate market has shown signs of life this year, but 2022 will likely be the year to watch. This year is shaping up as one of steady recovery for commercial properties while next year remains something of a wild card.
Jamie Woodwell, vice president of research and economics at the Mortgage Bankers Association (MBA), says that commercial-property investors still have unanswered questions that are creating pockets of uncertainty and keeping sales-transaction volumes lower than they were prior to the emergence of COVID-19 in March 2020. “There are still some hangover issues with the pandemic, whether that be still some uncertainty about property incomes or values, or other things that’ll just put a little bit of downward pressure on activity this year,” Woodwell says.
Commercial and multifamily mortgage originations were down 14% year over year in first-quarter 2021, MBA reported. This is an improvement, however, compared to last year’s steep decline. MBA estimates that 2020 volumes were down 26% compared to the 2019 record level of $601 billion. The trade group also projects that 2021 origination volume will increase by roughly 10% above the 2020 level of $441.5 billion.
Likewise, transaction volume for deals valued at $2.5 million or more rose by 11% year over year this past March, Real Capital Analytics reported. For the entire first quarter of 2021, however, sales volume dropped by 28% compared to the same period a year earlier.
Woodwell says that each property type is in a different stage of recovery. For example, industrial assets have benefited from a boost in online shopping, whereas hotels and some types of retail were devastated by lockdowns, social distancing and travel restrictions. The long-term fortunes of multifamily are favorable, yet there’s short-term uncertainty in the apartment sector regarding accumulated renter debt, as well the end of eviction moratoriums and government support for renters. Meanwhile, the long-term outlook for office properties is uncertain given the large number of people still working from home.
“The focus is shifting to what the world will look like for different properties,” Woodwell says. “There may be a little bit more confidence in the hotel properties while there continues to be a lot of discussion about work-from-home (policies) and how we’re going to use offices.”
There are still some hangover issues with the pandemic.
vice president of research and economics, Mortgage Bankers Association
The outlook for the U.S. economy also remains somewhat cloudy. Fannie Mae chief economist Doug Duncan told Scotsman Guide (see this month’s Q&A on Page 20) that the economy will experience huge growth in the second quarter of this year due to the federal government’s most recent stimulus package of $1.9 trillion. Gross domestic product (GDP) growth will probably cool down to about 2.5% annually by end of this year, so the economy should avoid dangerous runaway inflation. Yet, Duncan says, a boom-bust scenario isn’t out of the realm of possibility.
This is what makes 2022 so intriguing. Many questions about the economy and particular property types aren’t likely to be answered until next year. Lawrence Yun, chief economist for the National Association of Realtors (NAR), says he’s optimistic that strong GDP growth will produce a surge in commercial real estate sales. Commercial Realtors affiliated with NAR tend to close deals in the range of $1 million or less.
“I think it’s just inevitable,” Yun says. “Given that the economy is recovering, one should anticipate some pickup in transactions. Some owners, retail shops, they went bankrupt, but there will be new owners trying to take the opportunity at this point in the economy’s recovery.”
Rob Diodato, president of advisory firm York Commercial Finance, says it is still challenging for commercial mortgage brokers to get deals approved, but conditions have improved since last year. He says that property type and location matter a lot to lenders right now.
“There’s still a great unknown out there, and I think a lot of banks right now are dealing with the challenges of what’s in their portfolio and on those deals that are not performing,” he says. “So, a lot of lenders have taken a step back, taken a deep breath and said, ‘OK, you know, let’s see what we have on our books.’”
Diodato says, however, that mortgage brokers have more alternatives this year. If a lender rejects a proposal, another lender will often approve it. “It takes a little bit longer and it’s a little bit more frustrating for clients, but we’re still in a good interest rate environment,” Diodato says. “So, you know, you’re not really losing anything with respect to rate. That’s the positive side to it.”
Even unpopular assets, such as restaurants and hotels, can eventually land financing, he says. The property’s individual story carries a lot of weight in these cases.
“I’m in the process of refinancing one right now,” he says. “It is with a community bank in New Jersey. It just so happened that this type of restaurant had a good delivery business. It did a lot of pizza, so their numbers in 2021 are up as compared to 2019, which is hard to believe. But, you know, people were ordering out a lot and they were doing a lot of delivery. This business fared well, so it makes it an easier deal to get accomplished and done, whereas some restaurants are still grinding through that process.” ●