Mixed economic signals cloud the commercial real estate forecast

After six months of negative economic growth, third-quarter 2022 is expected to show a minor uptick in the nation’s gross domestic product (GDP), according to a new report from the Mortgage Bankers Association (MBA).
Economists for the trade group wrote in the MBA’s recently released Q2 2022 Quarterly Databook that expectations are for “positive, although slow, growth” in the third quarter of this year. The positive GDP estimates comes of the heels of the economy shrinking by 1.6% in the first quarter and by 0.6% in the second quarter.
In contrarian economic news, the MBA reported that the nation’s labor force continues to expand, with businesses adding an average of 349,000 jobs each month during the second quarter. Job growth jumped to 526,000 in July before dropping to 315,000 in August. The unemployment rate rose slightly from 3.5% to 3.7% from July to August, largely due to the 786,000 people who joined the labor force that month alone. Consumers continued to help prop up the economy, spending more on goods and services. Retail sales rose by 8.5% in first-half 2022 compared to year-ago levels. The figure excluded auto sales and parts dealers.
The MBA offered a mixed view for commercial real estate in the first six months of the year. On the positive side, the apartment and industrial sectors remained hot commodities. Apartment vacancy rates reached 5.6%, according to the U.S. Census Bureau, which is the lowest level since the 1980s. The industrial market had similar vacancy rates. The tight markets for apartments and industrial assets resulted in asking-rent increases. Average apartment rents were up by an estimated 17% year over year. last year, although the typical renter saw an average increase of 6.7%, according to the U.S. Bureau of Labor Statistics.
The quarterly databook noted that commercial real estate recorded record dollar volume for sales across the major property types in the first half of this year, with first-quarter sales reaching $162 billion and second-quarter sales jumping to $169 billion. Sales during these six months were up 44% compared to the same period in 2021. But the fast pace faded in July, with sales volume falling by 7% from the same month in 2021. In August, the volume was down a whopping 41% year over year.
The retail and office sectors also continue to face difficult markets. In a separate white paper by the MBA, “A Framework for Considering Office Demand in a Post-Pandemic World,” the authors estimated that if remote and hybrid work continues with employees required to be in the office two or three days a week, there will be a 10% to 20% decline in demand for office space, with the decline impacting leases to varying degrees over the coming decade. Property incomes and values also could wind up falling by 10% to 20%, depending on the location and quality of the space.
The MBA also released estimates this week for year-end commercial and multifamily mortgage lending volumes. Commercial real estate lending is expected to fall to $766 billion this year, down 14% from 2021. Multifamily lending is expected to decline to $455 billion in 2022, a 7% percent drop-off from last year’s record of $487 billion. The trade group anticipates that commercial transaction levels will rebound to reach $848 billion in 2023, including $451 billion across the multifamily sector.
“We continue to see significant changes, volatility and uncertainty in the space, equity and debt markets that drive commercial real estate values and transaction volumes,” said Jamie Woodwell, MBA’s vice president for commercial real estate research.


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