Commercial real estate – what went wrong?

Mortgage originations are half of what they were last year

Commercial real estate – what went wrong?

John Adams once famously said that facts are stubborn things. The same applies to financial figures as it relates to the commercial real estate market, where mortgage originations are now half of what they were last year as a report lays bare.

Jamie Woodwell (pictured), head of commercial real estate research for the Mortgage Bankers Association, spoke to Mortgage Professional America about the various factors that have led to CRE corrosion. He began by reminding that to study CRE performance, one must do so by examining each of its three pillars – space, equity and debt – to gain a clear assessment.

“In a lot of ways, what we’re seeing started a good year-plus ago,” he said. “The first half of 2022, there was strong sales activity in commercial real estate. There was strong mortgage originations in commercial real estate, and the markets were really chugging along.”

Until they weren’t: “But then mid-year, in response to three different things, the markets started to cool significantly such that by the end of the year, sales and originations were down well more than half from a year earlier – and that continued into this year,” he said.

The three-pillar approach is then taken to determine what’s happened, he suggested. “What we’re seeing right now is that it’s a confluence of three separate markets – there’s the space market – supply and demand of office space, apartment space, retail space, industrial space and that drives rents, vacancies, properties and things like that.”

The next rung: “There’s the equity market and how investors are putting their money to work in commercial real estate, and that’s driven by the return they can get on other investments,” Woodwell noted. “That’s driven by whether they’re in a risk-on or risk-off mode and that then turns and hits rates and property values and sales activity.”

Learn what is a good ROI for commercial real estate in this article.


And the third pillar: “And then because commercial real estate is so capital-intensive, there’s the debt market, and then there’s the cost of debt, where interest rates are, the availability of debt, the demand for debt – all those kinds of things. Sometimes, something will happen in one of those three markets – the space market, the equity market, the debt market – that will sort of throw off commercial real estate players a little bit. What we’ve seen over the last year is really some pretty significant changes in all three of those markets.”

As a result, what we now have is a bottleneck: “The changes and some of the uncertainty there has led to this logjam in terms of transaction activity,” Woodwell said.

Multifamily lending market remained strong

It wasn’t all doom-and-gloom. According to its annual report of the multifamily lending market, the MBA reported that last year 2,242 multifamily lenders provided a total of $480.1 billion in new mortgages for apartment buildings with five or more units. That’s just a 1% decline from levels seen in 2021. The MBA reports that 33% of the active lenders made five or fewer multifamily loans over the course of the year.

“Multifamily borrowing remained strong in 2022, largely as a result of lending by banks,” Woodwell said. “Beginning in last year’s third quarter, rising and volatile interest rates, uncertainty about property values, and questions about some property fundamentals led to a falloff in borrowing and lending across commercial property types, including multifamily.”

That was then, and this is now: “Most capital sources saw a significant decline in lending activity in 2022, but bank activity increased by an almost equal amount,” Woodwell said. “It’s unlikely that this momentum is occurring this year, given current evidence that banks have tightened underwriting standards and borrower demand has weakened.”  

MBA’s report is based on its surveys of the larger multifamily lenders and the recently released Home Mortgage Disclosure Act (HMDA) data that covers multifamily loans made by many smaller lenders, particularly commercial banks. The top five multifamily lenders in 2022 by dollar volume were: JP Morgan Case & Co.; Wells Fargo Walker & Dunlop; Berkadia; and Capital One Financial Corp.

Don’t deploy the parachute just yet

The freefall is far from over. According to the MBA’s forecast, total commercial and multifamily mortgage borrowing and lending is expected to fall to $504 billion this year, which is a 38% decline from the 2022 total of $816 billion.

Multifamily lending alone is expected to drop to $299 billion this year – a 38% decline from last year’s total of $480 billion But there’s a silver lining: The MBA anticipates that borrowing and lending will rebound by 2024 to $856 billion in total commercial real estate lending, with $452 billion of that total in multifamily lending.

It’s all about uncertainty and investor anxiety, the economist suggested: “Higher and volatile interest rates, uncertainty about property values, and questions about some property fundamentals have led to an impasse in property sales and mortgage originations this year,” Woodwell said. “Our baseline economic forecast anticipates that interest rates will moderate over the next year and a half, helping to break the current logjam in transaction activity and bringing relief to financing costs and property valuations.”

If a better 2024 awaits per the MBA, investors are likely already eager to usher in the new year.

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