Tough times ahead for commercial and multifamily mortgage markets: MBA

Economic volatility likely to cause instability for commercial real estate markets

Tough times ahead for commercial and multifamily mortgage markets: MBA

The impressive results enjoyed by the commercial and multifamily markets are unlikely to continue in 2023, according to a new forecast by the Mortgage Bankers Association.

MBA’s 2023 Commercial Real Estate Finance (CREF) Outlook Survey pointed to an unsettled market for commercial and multifamily mortgage financing as economic turmoil persists. The survey polled 55 executives of the top commercial and multifamily mortgage finance firms for their outlook for the year ahead.

“The typical FOMC member’s expectations for the federal funds rate at the end of 2023 increased throughout 2022, jumping from 1.6% to 5.1% as of December 2022,” explained Jamie Woodwell, MBA’s head of commercial real estate research. “Those shifts in outlook from the Federal Reserve are both a response to changing economic conditions and a cause of change themselves. 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.”

Total commercial and multifamily mortgage borrowing and lending is projected to plunge $700 billion this year – a 5% decline from an expected 2022 total of $740 billion. Multifamily lending alone is anticipated to fall $393 billion this year, down 11% from 2022’s expected total of $439 billion.

Commercial real estate markets are entering 2023 amid a great deal of uncertainty and, as a result, a significant slowdown in activity,” Woodwell said. “Leaders of top commercial real estate finance firms believe that overall uncertainty will dissipate over the course of the year, but with a host of factors that will drag –rather than boost – the markets in 2023.”

Other findings of MBA’s CREF survey include:

  • Every survey respondent considers today’s market either somewhat or very unsettled.
  • Among property types, the office market is viewed as most negatively affecting today’s borrowing and lending markets, while a majority of respondents view the industrial market outlook as having positive impacts.
  • Cap rates and valuations, base interest rates, and mortgage spreads are all viewed as having negative impacts on today’s financing activity.
  • Originators expect the market to stabilize over the course of 2023.
  • In 2023, lenders are expected to have a (slightly) stronger appetite to lend than borrowers will have to borrow.
  • Borrowing and lending volumes are expected to decline in 2023.
  • No capital sources are broadly expected to see increases.
  • There are more deals looking for debt than there is debt looking for deals.
  • Across a variety of factors affecting the markets, more are seen as negative than positive for 2023.

“Among the factors most viewed as negative by CRE leaders are office market fundamentals, short-term interest rates, inflation, long-term interest rates, the broader economy, and adjustable rate and short-term loans maturing in today’s market,” said Woodwell. “Industrial and apartment market fundamentals and changes in the severity of the COVID-19 pandemic are the only factors seen by more leaders as positive than negative for the market.”

What are your thoughts on MBA’s commercial/multifamily market outlook? Share them in the comments below.