MBA Sees Distress in Q3 Commercial Real Estate Data

The Mortgage Bankers Associates (MBA) notes that, while some economistsrnmay have declared that the recession technically ended with the third quarter,rnits effects are still plaguing the real estate industry.   The Association'srnQuarterly Databook for the period ended September 30 shows that the commercialrnreal estate market has yet to show many signs of recovery from the downturn.

The report states that vacancy rates rose during the thirdrnquarter for all major property types, with office and retail properties showingrnthe greatest impact.  Retail vacanciesrnrose from 12.9 percent to 18.6 percent during the quarter while office vacanciesrnincreased 3.4 points to a 19.5 percent rate. rnIndustrial properties increased from 9.8 percent to 13.0 percent whilernapartment vacancies rose from 6.5 percent to 8.4 percent.

Not surprisingly this lack of demand has been reflected in bothrnrental rates and property sales.  Rentalrnprices have asked for residential rentals have fallen by 6 percent, and fell 9rnpercent for both industrial and office properties and 8 percent for retailrnspace.  Property sales continued to fall asrnwell.  Year-to-date sales by the end ofrnthe third quarter were down 72 percent from the same period in 2008 and thosernsales had been off 66 percent from 200y. rnThis decline was reflected across all property types.

The sales volume is so low and so many sales are distressedrnin nature that trends in the prices these sales are bringing are difficult tornassess; the MBA report calls the data “spotty at best.”  It quotes Moody's/REAL index as showing arndrop of 11.5 percent in value during the quarter and NCREIF TBI as reporting arn4.4 percent increase.  This means thatrn”current transactions – and the gauges that track them – may not representrntrue 'values' of non-distressed properties.”

New construction activity also continues to suffer. MBArnnoted that construction was started on only 5,000 multifamily housing units inrnOctober.  This is the lowest level ofrnactivity recorded since this data was first tracked in 1959.  

Mortgage origination activity during the quarter sufferedrnfrom the lack of transaction volume as well as tight credit markets.  During the third quarter origination was 54rnpercent below levels one year earlier which were, in turn, 53 percent lowerrnthan in 2007. Fannie Mae and Freddie Mac continued to support the multi-familyrnmarket and banks and life insurance companies each showed a small pick-up inrnvolume.  There are also signs that CMBS issuesrnpicked up a bit in the fourth quarter which, MBA said, may signal a partial unfreezingrnof that market.

Few new loans are being made and existing ones continue tornbe paid down and off.  The FederalrnReserve reports a 0.8 percent decline in outstanding commercial and multifamilyrnmortgage debt during the quarter and the holdings of thrifts dropped by $20rnbillion. However, with the exception of construction loans, banks and thriftsrnincreased their commercial and multifamily mortgages by $6 billion and this, withrnthe increase in multifamily mortgages held by Fannie Mae and Freddie Mac andrndecreases in the balances of mortgages backing commercial MBS, resulted in thernoverall commercial/multifamily mortgage debt held during the quarter remainingrnessentially unchanged.

The performance of existing mortgages is being experiencedrndifferently by various investor groups. The general stress of the commercialrnand multifamily market is felt everywhere but loans held by life insurancerncompanies, Fannie Mae, and Freddie Mac have generally performed better thanrnthose held by banks, thrifts, and in commercial MBS. These investor groups arerngoing through an experience which MBA describes as roughly on par with what wasrnseen following the stress of the late 1980s through the early 1990s. As arnwhole, commercial and multifamily mortgages are performing better than otherrntypes of loans, particularly construction loans and single-family mortgages.<pThe reports states that,rnwhile the phrase "real estate lags the economy" is a common one, itrnis never clear whether the speakers are referring to property prices,rnvacancies, rents, delinquencies, or some other aspect of the market or whetherrnis applies more to the commercial or the single-family sector. "Regardlessrnof the specifics," the report concludes, "the fact that the economy -rnat least as measured by GDP – began to grow during the third quarter may beginrnthe countdown on the 'lag' and on when the economy will have grown sufficientlyrnto rekindle demand for commercial real estate. rnGiven the depth of the recent downturn, the commercial property marketrnhas a significant amount of ground to re-coverrnrn

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