ORLANDO, FLA. — The U.S. economy and the stock market are sending opposite messages to the commercial real estate community, causing many industry professionals to scratch their heads.
On the one hand, the leading economic indicators are solid. Monthly gains in nonfarm payroll employment averaged 280,000 during the fourth quarter of 2015, and the national unemployment rate ended the year at 5 percent. Average hourly earnings rose 2.5 percent in 2015, a sign that wage growth is accelerating.
The Federal Reserve’s decision in December to raise short-term rates by a quarter percentage point — the first such move in nearly 10 years — was an acknowledgment that the recovery has legs. Real gross domestic product grew a modest 2.4 percent in 2015.
But the Dow has fallen about 2,000 points in the last couple of weeks, and the 10-year Treasury yield has dropped approximately 40 basis points during the same period. Meanwhile, several of Europe’s central banks have cut key interest rates below zero. The Bank of Japan did the same in late January to stimulate its economy.
Add to the mix the concerns about China’s economic growth and conflict in the Middle East, and it’s easy to see why there has been a strong flight to U.S. dollar-based assets.
“You’ve seen the dollar on a broad basis increase about 20 percent relative to other currencies around the world, and that’s being reflected in huge capital inflows into the U.S.” says Michael Fratantoni, chief economist and senior vice president of research and industry technology at the Mortgage Bankers Association. His comments came during a press conference at the Hyatt Regency Orlando, the site of the 2016 Commercial Real Estate Finance and Multifamily Housing Convention & Expo.
“How do you square those two stories of what looks like a lot of fear, a lot of concern, a lot of volatility in the financial markets versus what’s a pretty reasonable picture in terms of the fundamentals of the macroeconomic side?” Fratantoni asked rhetorically.
The current strength of the U.S. economy, not the vagaries of the stock market, will guide the Federal Reserve’s monetary policy, the veteran economist believes. Fratantoni fully expects the Federal Reserve to view the current financial market volatility as “just transitory” and raise short-term interest rates twice in 2016 before picking up the pace in 2017 and 2018 with at least four rate hikes per year.
MBA’s forecast calls for real gross domestic product to grow between 2 percent and 2.5 percent over the next few years. But does the Dow’s recent swoon give Fratantoni pause that his forecast is too optimistic?
“One of my favorite quotes from Milton Friedman is that the stock market predicted nine of the last five recessions,” says Fratantoni. “[The stock market] is historically sensitive. Sometimes it’s right. The markets are telling us something, but it’s not really clear what they are telling us.”
Strong Real Estate Vital Signs
Reis was an exhibitor at the MBA CREF/Multifamily Housing Convention & Expo held in Orlando.
By any measure, the commercial real estate market is performing well.
Vacancy rates are down, rents are up, incomes are climbing and property sales transactions are up. The data also shows that prices are up, cap rates are down, loan originations are up and mortgage delinquencies are down.
“It’s sort of what one would hope to see across the board,” says Jaime Woodwell, vice president of research and economics for the MBA. “So, when we look at our numbers covering the real estate finance markets, you see that strength flowing right through.”
The MBA’s quarterly survey of commercial/multifamily mortgage bankers’ originations shows that volume was up 19 percent in the fourth quarter of 2015 on a year-over-year basis. And for the year, deal volume in 2015 was 24 percent higher than 2014.
That’s roughly on par with the increase in U.S. property and portfolio sales transactions recorded by Real Capital Analytics, which saw total deal volume rise 23 percent for all of 2015 versus 2014.
“For three of the four major investment groups, the fourth quarter was the largest originations quarter on record,” according to MBA.
Mortgage originations for Fannie Mae and Freddie Mac were up 59 percent in 2015 versus 2014. Banks and thrifts also recorded a 59 percent increase, followed by life companies at 23 percent and CMBS at 6 percent. “It was a very strong end to a very strong year,” says Woodwell.
All totaled, the $497 billion in commercial and multifamily mortgage originations recorded in 2015 was second only to 2007 when the industry recorded $508 billion in originations.
“If [interest] rates climb more quickly than we anticipate and cap rate spreads either hold or rise, that could put a damper on originations activity through lower sales activity and lower price appreciation,” says Woodwell. “Likewise, if rates stay lower longer that would probably put a bit more gas on the pedal for originations.”
Wall of Loan Maturities Recedes
Some $183.3 billion of $1.7 trillion of outstanding commercial and multifamily mortgages held by non-bank lenders and investors will mature in 2016. That’s a 51 percent increase from the $121 billion that matured in 2015, according to the MBA. Maturities are expected to grow to $208 billion in 2017.
“More commercial and multifamily mortgages are maturing in 2016 and 2017 than have the last few years, but early refinancings and paydowns are chipping away at those totals,” says Woodwell. “The bottom line is that the ‘wall of maturities’ that has been the focus of concern the last many years is receding.”
Last year’s survey tracked $225 billion of commercial and multifamily mortgages that were set to mature in 2016. This year’s survey found that 2016 maturities had dropped by 18 percent to $183 billion as loans were prepaid or paid down. That’s roughly the same amount that matured in 2010.
The loan maturities vary significantly by investor group. Just $11.4 billion (2 percent) of the outstanding balance of multifamily and health care mortgages held or guaranteed by Fannie Mae, Freddie Mac, FHA and Ginnie Mae will mature in 2016.
Life insurance companies will see $26.6 billion (7 percent) of their outstanding mortgage balances mature this year. Among loans held in CMBS, $114.6 billion (19 percent) will come due in 2016. Among commercial mortgages held by credit companies and other investors, $30.7 billion (18 percent) will mature this year.
— Matt Valley