New US Commercial Property Lending Growth Could Decline in 2021 As Spending, Valuations Slow
The commercial real estate industry has been on an upswing for the past decade, but a closely watched group is projecting a slowdown after a blast of new loans this year.
U.S. commercial and multifamily mortgage bankers are expected to close a record $683 billion of loans in 2020. This is a 9% increase from 2019’s anticipated record volume of $628 billion, according to the Mortgage Bankers Association.
However, if that growth materializes, it could mark the end of the run for ever-higher industry loan growth fueled by increased spending and rising property valuations.
The Mortgage Bankers Association, based in Washington, D.C., is projecting a 3% contraction in origination volume in 2021.Predictions of softening demand for commercial real estate in some markets were included in a recent webinar from CoStar’s Advisory Services.
“It’s important to note we’re calling for lending to increase to a record $683 billion this year, which surpasses last year’s anticipated record of $628 billion,” an MBA spokesman told CoStar. “While our 2021 forecast of $660 billion is just short of the anticipated record in 2020, the total is still higher than 2019 and is the second-highest on record.”
By comparison, 2018’s new loan volume totaled $574 million.
“Our figure is plateauing, taking into consideration rates may be further along in the economic cycle,” the MBA official said.
The MBA anticipates volumes will trail off in 2021, falling slightly to $660 billion in commercial and multifamily mortgage originations. That would be a 3% decline.
Total multifamily lending alone is forecast to rise 9% to $395 billion this year, surpassing last year’s expected record total of $364 billion. New volume is expected to decline 1% in 2021 to $392 billion.
“Commercial and multifamily real estate markets got an adrenaline shot from low interest rates in 2019,” Jamie Woodwell, MBA’s vice president for commercial real estate research, said in the group’s latest outlook. “In addition to making mortgage borrowing less expensive, lower yields on a broad array of investment options are buoying the values of industrial, apartment, office, retail and other income-producing properties. This increase in property values is expected to translate into increased sales transactions and demand for mortgage debt in 2020.”
The association’s lending forecast going into this year and next is in line with other analysts’ reports projections.
Bond rating company DBRS Morningstar said it expects more growth ahead for U.S. commercial real estate in 2020. The pace of expansion however could slow thanks to already strong fundamentals that will be tough to improve upon.
“With the Federal Reserve on the sidelines for at least another year and the volume of available credit remaining high, we believe originations in 2020 will likely meet or exceed 2019 volume,” DBRS analysts noted in their forecast.
Economic growth is likely to slow in 2020, according to DBRS. Factors include lower spending by corporations amid reduced global growth and the waning effects of fiscal stimulus and 2019’s interest rate cuts.
Kroll Bond Rating Agency said that property operating cash flows and valuations may have their best years behind them. The commercial mortgage bond market could begin to see more properties underperforming.