Market Commentary Blog

Rising borrowing demand and supply of commercial credit indicate that a broader recovery is underway. There are new signs of life in the commercial mortgage market that indicate a strengthening of the recovery in the commercial property sector. The Federal Reserve’s Senior Loan Officer Survey shows that nearly half of all banks report stronger demand for commercial loans.

The picture was mixed across property types, with apartments enjoying strong demand as vacancy rates push yet lower, the office sector experiencing a slow recovery, and retail sector still barely out of the starting gate.  The job market firmed a bit in recent months but still lacks vigor.  Household formation lost steam, leading to less demand for apartments in the near term (or perhaps reflecting a lack of availability). 

The economy showed more signs of financial healing in the third quarter, according to the Federal Reserve Board’s Flow of Funds Accounts. Commercial lending strengthened as transactions and prices picked up.  Commercial mortgage net lending increased to nearly $80 billion annualized, the strongest since prior to the financial crisis. Commercial banks provided $55 billion, roughly two-thirds of the total net lending.  Life insurance companies increased their net position by the largest amount since the crisis, and net issuance of CMBS was positive for only the second time since 2007.

Homeownership is stabilizing, but weak job market is still holding back both rental and ownership markets.  The home ownership rate held steady for the final three quarters of 2013 at 65.1 percent, after having declined a half-percentage point or more each year since its peak in the mid-2000s (Chart 1).  This tentative stabilization suggests that housing markets may soon move beyond the mortgage crisis and back to a period of more normal recovery and growth.

Market conditions improved across all property types in the fourth quarter.  Strong demand for apartments pushed absorption higher, although a pick-up in new supply tempered the decline in vacancy rates.  Office rents increased, despite the slow decline in office vacancies. 

An upswing in bank lending in the fourth quarter signals higher levels of activity across nonresidential real estate, multifamily residential and real estate construction and development. Bank lending for real estate investment is closely related to trends in transactions and prices.  Recently-released data from the FDIC on bank lending reveal increased lending for investment in nonresidential real estate, multifamily residences, and construction and development.

Familiar themes from 2013 in commercial property markets carried over in the first quarter of 2014:  Apartment markets held firm despite the steady ramp-up of new supply, the office sector continued to recover—gradually—but the retail market lagged behind.

The Single Family Rental (SFR) housing market has grown rapidly since the start of the housing crisis. Home prices have risen sharply, however, especially in some of the markets where institutional investors including several REITs have set up SFR business.  This raises questions about the prospects for the SFR sector.

It has been popular to say that the economy suffered permanent (or at least long-lasting) damage during the financial crisis, and the economy’s new speed limit once recovery was fully underway would be 2 percent GDP growth and nonfarm payrolls rising 160,000 or so per month.

Fundamentals for the multifamily housing sector remain firm, even as new construction comes onto the market. Vacancy rates remain at their lows for the cycle, and rent growth has firmed. Going forward, we anticipate that the pent-up demand for apartments is likely to continue to bolster household formation, which is the ultimate source of demand for multifamily housing.