Commercial Real Estate Loan Growth Plateaus

Investors and lenders dove into apartment and industrial mortgages in the final three months of last year while retail and office property lending slowed, setting a pattern industry executives expect to extend into 2019.

Total commercial and apartment mortgage origination for 2018 rose 3 percent, after a 14 percent surge in the fourth quarter, according to preliminary estimates from the Mortgage Bankers Association.

Origination for apartment properties increased 22 percent for the year, with loans from government-sponsored enterprises leading the surge. Loans made for industrial properties rose 12 percent for the 12 months, while those for hotel properties climbed 5 percent.

Last year "ended on a strong note for commercial mortgage borrowing and lending, with fourth-quarter origination 14 percent higher than a year earlier, despite the broader market volatility," said Jamie Woodwell, Mortgage Bankers' vice president for commercial real estate research.

However, Woodwell added that "the market as a whole ended the year roughly flat compared to 2017, continuing a plateau we've seen in mortgage borrowing and lending since 2015" as a result of moderation in both property value growth and building net operating income. The trend is expected to continue this year.

Typical of the apartment surge were results recently released by Freddie Mac, which set a record with $77.5 billion in loan purchase and guarantee volume for 2018, and $500 million in low-income housing tax credit investments. The $78 billion in total production bested the company's prior record of $73.2 billion set in 2017.

Life insurance companies boosted their loan origination by 10 percent in 2018 over 2017. Typical of that was PGIM Real Estate Finance, which originated its own record $18.1 billion in financing in 2018, up from $14.8 billion in 2017. Record production in multifamily and core-plus lending led the boost. PGIM Real Estate Finance is the commercial mortgage finance business of PGIM Inc., the $1 trillion global investment management business of Prudential Financial Inc.

PGIM Real Estate Finance has as much as $18 billion available for financing in 2019 and said it will again look to target growth in apartment and industrial loans.

However, the stepped up lending from government-sponsored enterprises and life insurance companies was offset by decreased loans from banks and conduit lenders feeding the mortgage securities markets. Loans for commercial bank portfolios decreased 10 percent and loans for CMBS fell 26 percent.

By property type, office property origination was down 7 percent, retail properties declined 13 percent and healthcare properties decreased 16 percent.

Commercial and multifamily mortgage origination is expected to remain roughly on par with the volume in the past two years, according to the Mortgage Bankers. The association projects commercial and multifamily mortgage origination to total $530 billion in 2019, essentially flat from last year's $526 billion, and the record $530 billion in 2017.

Mortgage banker origination of just multifamily mortgages are forecast to rise 1 percent this year to $264 billion, with total multifamily lending at $315 billion. The association expects the origination total to extend into 2020.

"Slowing global and domestic growth may have an impact on overall demand, but readily available equity and debt for commercial real estate should support transaction volumes," Woodwell said.
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