Trying to accurately predict what the future of loan originations look like in a market with more curves, corkscrews, steep climbs, and deep drops is a bit of a challenge. But it’s not impossible if we examine 2021 and how things look now.
Last year’s commercial mortgage loan originations saw record-setting numbers. In fact, lenders soared past 2021 loan-origination goals by 25%-50% margins. From January through September, CMBS originations hit $102 billion—the single-highest nine-month loan origination volume recorded since 2007, according to Trepp, LLC.
Investment sales during the same period hit $462.1 billion, 10% more than 2019’s highest average and—according to Real Capital Analytics—the highest nine-month buyer’s market ever recorded.
In their buying spree, investors scarfed up commercial properties partly because they offered higher yields compared to the bond market.
Decreasing Loan Spreads
Last year, loan spreads on mini-perm, long-term non-recourse perm, and construction loans. For example:
- Life-company loan spreads fell to 140 bps over Treasury (sub-3% in Q1)
- Bank spreads fell to between 160 bps and 170 bps/FHLBR
- CMBS spreads sat at +/- 175 bps/Treasuries
Meanwhile, banks offered interest-only periods of three to five years. Life companies and CMBS lenders offered 10 years interest-only payments for low leveraged transactions.
Demand Highs and Lows
For nearly two years, we’ve seen a lower demand for retail and office space. However, a pandemic-driven increase in ecommerce accelerated demand for warehouse and distribution spaces with retailers needing to significantly increase storage capacity to meet and manage consumer demand. In fact, distribution centers/warehouse values soared nearly 40% compared to pre-pandemic levels. Rents also rose 7.1% between Q1 2020 and Q1 2021, and warehouse sizes grew from an average of 127,000 square feet 10 years ago to more than 180,000 square feet today.
The market also saw significant increases in demand for multifamily rentals, especially with an overheated residential home market priced too many first-time homebuyers out of the market forcing them to continue renting. As a result, multifamily property values increased about 20% as occupancies and rental rates also increased substantially.
So What Do 2021 Numbers Mean for 2022?
A market that remains volatile makes it difficult to forecast loan activity for this year. It was easier last year to predict that capital markets would rebound from a pandemic-affected economy forcing lenders to sit on the sidelines. The Federal Reserve’s aggressive bond buying and Treasury’s stimulus programs injected vast liquidity into the market, which kept long- and short-term interest rates low. Plus, 2021 was the year where pent-up loan demand erupted.
However, inflation makes it difficult to project loan originations for 2022. Forecasters surveyed by the Federal Reserve Bank of Philadelphia are predicting a 1.8% annual growth of the GDP in Q1 2022, down 2.1 percentage points from the 3.9% prediction in the last survey. The forecasters predict current-quarter CPI inflation will average 5.5%—up from the previous survey’s 3% forecast. Headline PCE inflation over Q2 will be 4.7%, again up from the previous forecast.
One question remains: were the Fed’s corrections to cushion COVID-19’s devastating impact on the economy in 2020 do too much? So many of these measures—significantly reducing borrowing rates and injecting the marketplace with liquidity—contributed to a rate of inflation the highest it’s been since February 1982.
We’ve seen inflation soaring in homes priced much higher than their actual value and increased demand for luxury goods like boats, cars, and vacation homes. In 2021, Treasury secretary Janet Yellen and Fed chairman Jerome Powell downplayed the possibility that serious inflation could result from too much stimulus. But the numbers don’t lie—and something must be done to control the current rate of inflation or we risk the possibility of another depression.
One solution? The Fed announced earlier this year that it plans to increase interest rates at least three times, although some forecasters predict the Fed could increase interest rates up to seven times over the next 12 months.
We could (and hopefully have) learned a few lessons from the rampant inflation of 1982. Inflation hurts—higher energy prices, rising rent, costlier grocery bills are all things we can’t live without. Very little has escaped inflation. Jason Furman, economic advisor in the Obama administration thinks, “The last $1.9 trillion Congress put out last spring went too far, even if it helped to speed recovery and put more people back to work.” He also says, however, “I would rather have low unemployment and high inflation than the opposite.” Did the Fed go too far? It will take historians many years of detailed study to determine the wisdom of the Fed’s policies.
Still Bullish for 2022
The Mortgage Bankers Association’s (MBA) 2022 Commercial Real Estate Finance (CREF) Outlook Survey is bullish, believing that commercial and multifamily loans will see strong borrowing and lending this year. Survey highlights include findings that:
- Lenders still want to make loans, with appetites predicted as “strong” or “very strong” for 2022.
- Borrowers still want to take out loans, with 94% of originators rating borrower appetites as “strong” or “very strong” for 2022.
- Every respondent expects market growth this year, with 63% anticipating total market originations increasing 5% or more and 74% expecting their own originations to increase 5% or more.
Sectors with the potential to have the greatest positive impact on markets this year include apartment, industrial, and retail market fundamentals, plus the economy, new construction activity, and an increased focus ESG. Potential negative effects could come from inflation, short- and long-term interest rates, legislative changes, continued work from home, regulatory changes, and possible increases in the pandemic’s severity.
Is this the year you buy or invest? Talk to one of the financial professionals at CREA United. This commercial real estate alliance takes an organic approach to networking, with members representing all disciplines—including finance—within the CRE industry.
Connect with Frank Levine or Erin Hoffman, of Certified Financial Services; Pete Rosas, of Capital One; Lisa Wagner of ConnectOne Bank; William Schmid, of Provident Bank; Michael J. Lanni, Jr., of Scheidel, Sullivan & Lanni CPA LLC; or Daz Connell, of Murphy Business Sales. Each is well-versed in the financing associated with diverse CRE sectors including corporate, industrial, medical & healthcare, office, retail, cannabis, Central NJ industrial, construction, dentistry, and multifamily group.