This article is republished with permission from TreppTalk.
Last year, $502 billion in commercial mortgages was originated. That was down slightly from the $504 billion originated the year prior and well shy of the $537 billion that the Mortgage Bankers Association (MBA) had predicted.
The Washington, D.C.–based trade group made the prediction last November based off the resurgence in issuance of commercial mortgage–backed securities (CMBS) during the second half of the year. Earlier, it had slashed its origination expectation because CMBS volumes had skidded from the year before. The CMBS market just did not provide the juice MBA thought it would.
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More Juice to Come?
The MBA is forecasting $515 billion of lending activity for this year, which would top the origination record of $508 billion set in 2007. A total of $267 billion of this year’s expected volume would be composed of multifamily loans. The housing finance agencies have been on a successful streak, with Fannie Mae writing $55.3 billion in loans and Freddie Mac writing $56.8 billion. While both are subject to origination caps by their regulator, they are able to exceed those caps when they write loans against affordable housing.
If lenders write the volume that the MBA expects, the total universe of commercial mortgages should top $3 trillion by the end of this year. Looking further ahead, MBA expects origination volume to hit roughly $525 billion in 2018, simply because fewer loans will need to be refinanced.
The MBA looks at a variety of factors when determining lending volumes, including general economic conditions, interest rates, and how attractive commercial real estate will remain for investors.
The trade group anticipates that the economy will improve, as gross domestic product is expected to grow quarterly by at least 2 percent this year. That’s not taking into account any potential benefits from federal policies involving taxes and regulations. Meanwhile, interest rates will increase, with the yield from the ten-year Treasury climbing from its current level of roughly 2.4 percent to 2.8 percent by the fourth quarter.
Those economic data should bode well for commercial real estate, which is often viewed as a hedge against inflation due to the fact that leases include escalation clauses that often mimic changes in the Consumer Price Index. Investors, both domestic and foreign, continue to view U.S. commercial real estate as a safe haven. So, despite a slow start to the year, property sales ought to remain healthy, providing plenty of opportunity for lenders.
Another Brick in the Wall
The much-talked-about “wall of maturities,” a big driver of lending volume last year, will continue to play a role in 2017. The MBA noted that many loans, particularly the best-performing ones, were refinanced well before their balloon dates so that borrowers could take advantage of historically low interest rates.
But plenty of loans still need to be taken out. According to data from Trepp LLC, the volume of maturing CMBS loans for the next six months stands at $65.6 billion, roughly $11 billion per month. Maturity volumes then taper off to an average of about $7 billion per month.
The MBA pegged the volume of nonbank loans, which would include CMBS, maturing in 2017 at $176 billion. That should provide plenty of opportunity for lenders for the next year.
However, the volume of nonbank maturities declines to roughly $110 billion in 2018. Presumably, that will be offset by an increase in property sales volume. In 2019 and 2020, maturities decline even further, before picking up to roughly $125 billion in 2021.
* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.