The ongoing coronavirus pandemic and the subsequent economic fallout is continuing to disrupt the commercial and multifamily real estate markets, with originations expected to see a significant drop this year, before making a partial recovery in 2021. The Mortgage Bankers Association (MBA) predicts commercial and multifamily bankers will close $248 million of loans back by income-producing properties this year; a 59% decline in activity compared to 2019’s record volume of $601 billion. Total multifamily lending alone, which includes some loans made by small and midsize banks not captured in the overall total, is forecast to fall 42% to $213 billion in 2020 compared to $364 billion last year.
“Net operating incomes (NOI), property values and cap rates across the different property types are expected to experience varying levels of stress in the months ahead, with hotel and retail properties already being the hardest hit,” said Jamie Woodwell, vice president for commercial real estate research at MBA.
A challenge with the forecast, he explained, has been the different ways the downturn is affecting different property types. While lodging and retail have been well understood to be the hardest hit, these two property types collectively accounted for only 13% of originations last year. Federal government stimulus has also been a major factor in helping unemployed Americans keep up with their rent and housing payments, which is has helped keep the multifamily sector afloat so far.
Rebound in 2021
MBA anticipates a partial rebound in lending volumes in 2021, with activity rising to $390 billion in commercial/multifamily mortgage bankers originations and $308 billion in total multifamily lending.
As for the impact on property values, it’s too early to say. While there are notable disruptions in the multifamily and office sector, Woodwell says there are ample reasons to expect relative stability.
“Looking across all property types, we expect the aggregate decline in NOI this recession could exceed that of the 2001 recession or GFC, but that impacts will be very different across different property types. The overall decline will also be concentrated in 2020.”
Some of the important drivers to consider when looking at future commercial mortgage activity includes the course of the virus, and the government policies to address it, which are still unknowns. Should government support continue as the economy rebounds, Woodwell believes the apartment market will likely remain relatively balanced. As for office properties, the outcome will hinge on how companies decide to move forward in terms of a return to the office, or if they choose to embrace a more permanent work-from-home structure.
“Given the speed with which the COVID pandemic has hit, and our continually shifting social and economic responses to it, it is hard to know where we are at any given point in time, let alone where we might be headed.”