WASHINGTON, D.C. — The Mortgage Bankers Association (MBA) projects that total commercial and multifamily mortgage borrowing and lending is expected to fall to $700 billion in 2023, a 5 percent decline from an expected volume of $740 billion in 2022. Multifamily lending volume alone is expected to drop to $393 billion in 2023, an 11 percent decline from an expected total of $439 billion in 2022.
The projected drop in borrowing and lending reflects current market conditions. Jamie Woodwell, head of commercial real estate research for MBA, which is based in Washington, D.C., underlined that the forecast matched what the association had been hearing from commercial and multifamily mortgage finance professionals, with many indicating the Federal Reserve’s multiple interest rate increases in rapid succession have been a key factor in the projected decline in lending and borrowing activity.
At its December meeting, the Federal Reserve raised the benchmark federal funds rate by half a percentage point, a smaller increase than the four consecutive three-quarter-point hikes earlier in 2022. The Fed is showing no sign of slowing rate hikes in 2023, with Chairman Jerome Powell announcing after the meeting that the central bank will continue to raise rates for quite some time, keeping them at elevated levels until inflation is significantly reduced.
“Commercial real estate markets are not immune to these shifts, and we expect borrowing and lending backed by commercial and multifamily properties to decline again this year,” says Woodwell. “Uncertainty and volatility around the paths of the economy, interest rates and property valuations will likely continue to cause instability for commercial real estate markets well into this year.”
Despite the projected decrease in total annual originations in 2023, the MBA anticipates borrowing and lending will rebound in 2024 to $887 billion, including $483 billion in multifamily lending.
“The rise in interest rates and required investment yields during 2022 unsettled the commercial real estate capital markets,” explains Woodwell. “As that shock wears off and investors adjust, we expect the market can return to more normal functioning [in 2024]. Property values and incomes are still up considerably from where they were three or more years ago, meaning there remains a great deal of equity for owners to tap into.”
Woodwell believes that 2023 will likely be a year of normalization — and the faster the market can achieve a state of normality, the better.
“The greatest challenge will be cutting through uncertainty about, and volatility in, the paths of interest rates, incomes, rents and more,” says Woodwell. “As the picture becomes clearer, activity should pick up.”