After a gloomy 2023, the Mortgage Bankers Association (MBA) expects commercial activity to rebound, with overall borrowing and lending to rise from last year’s $444 billion to $576 billion in 2024. News of the 29% jump in lending was a highlight of the annual MBA CREF Convention & Expo in San Diego in February. Jamie Woodwell, vice president of MBA’s research and economics group, spoke with Scotsman Guide following the conference to share his perspective on this year’s commercial markets.
What was your main takeaway from the attendees at the MBA CREF Convention & Expo?
What struck me this year was the different takes from different parts of the market. We highlighted in our presentation that the $4.7 trillion in commercial refinancing that will be happening in the coming years includes loans that are incredibly varied. They are based on different property types, different capital sources, different loan vintages and different geographic areas. The loans are just across the board. I kept hearing that in conversations with various people who are in different parts of the market. It showed that it is really not possible to paint commercial real estate in broad strokes. When you start breaking it down, the commercial markets are not monolithic, and each loan is slightly different from the next.
Last year, you forecasted total commercial and multifamily lending at $684 billion. The actual number ended up being $444 billion. What changed after your initial forecast?
Interest rates were certainly a significant part of it. When we look at what drives activity, we’ve found that originations and sales transactions really follow property values. When property values go up, originations, borrowing and lending go up. When property values go down, borrowing and lending go down. Property values fell last year and were heavily influenced by the interest rate environment.
You also had a lack of sales activity in the market, which brought a bit of opaqueness to where property values were at and that led a number of market participants to sort of sit on their hands for a while. There were also continuing questions about the office market and where those properties’ valuations are at. That was definitely a drag on activity for last year. I think we are just starting to figure out the valuations of office properties.
MBA’s forecast for 2024 calls for lending and borrowing to rise 29% from 2023 levels. Where do you expect to see that growth?
Our expectation and hope are that 2023 was really the trough in terms of transaction activity and a lot of that uncertainty. Over the course of 2024, we will gain more stability in rates and more visibility in values, and we will get better discernment about property fundamentals, particularly around office. All that should help us start to see a pickup in transaction activity. We are hearing from a number of lenders that they have the capacity and interest to make loans.
Multifamily deals are expected to rise from $271 billion in 2023 to $404 billion by 2025. Is there a worry about a glut of apartments coming to the market in the next few years?
In past years, we went through a period where there was a significant mismatch between demand for multifamily, which was very strong, and supply, which was almost nonexistent. That mismatch led to nearly record low vacancy rates and very strong rent growth. We’ve seen that start to turn as more supply has come on the market. We also have a strong pipeline. There are a little less than 1 million multifamily units under construction right now and they will be coming online during the next 18 months. The question is where do we go after that 18-month period and whether we are seeing a slowdown in new construction activity now that will impact supply in 2025 and 2026. I don’t think the answers are in yet on that.
How many interest rate cuts does MBA expect from the Fed this year and where do you stand on the chances of a recession?
Our latest thinking is probably three rate cuts this year. That is data-dependent, so if the data comes in stronger or weaker than currently expected, that could change our expectations. But it’s important to remember that’s all focused on the short end of the curve. There are a lot of factors such as inflation, expectations, (gross domestic product) growth and federal deficits that will impact long-term rates.
Our economic forecast is updated every month, so all is subject to change, but we anticipate things slowing down at the beginning of this year. That is based on credit being as tight as it is with banks and other factors, including the state of interest rates. Does that mean negative growth? Our base case is yes, but it also could just mean that we see slower growth than we did at the end of 2023. ●
