The year 2020 is starting with some uncertainty, as some economists predict a recession that has the potential to end a string of strong years for the commercial real estate market.
Jamie Woodwell, the Mortgage Bankers Association’s resident expert on commercial real estate, spoke with Scotsman Guide about trends in 2019 and the outlook for 2020, including the ramifications of a possible downturn in the U.S. economy.
Given the data available through October 2019, how did the commercial real estate market fare last year in terms of sales and origination volumes?
While we haven’t seen strong growth in property sales, we have seen strong growth in mortgage originations. Through the first half of the year, borrowing and lending was up about 11% compared to the first half of [2018]. That’s really been driven by some pretty strong appetite from all the different capital sources.
Have any asset classes stood out?
Multifamily has consistently been a darling of investors and lenders alike. It’s not just the dominant property type in terms of lending activity, but it’s increasing its lead as well. You also have a lot of investor and lender interest in industrial [properties], whether it be e-commerce or demand for logistics and warehouse spaces. We’ve been seeing some new supply coming online there, but the fundamentals have been holding up pretty well. We’ve seen a fair amount of deal activity in industrial, particularly on the mortgage side, through the first half of 2019.
Is there any asset class that is faltering?
[There have been] a lot of discussions around retail. Certainly, the headlines have raised a lot of concern. We’ve seen a decline in the dollar volume of loans going to retail. One thing we do hear from folks in the market is that there are a lot of different types of retail from market to market, property to property. You can have very different situations going on, depending on what one’s portfolio looks like.
There has been much speculation about the end of the cycle and a possible recession this year. What impact has that had on investors?
The key economic variables are continuing to show strength, whether that be the GDP (gross domestic product), job growth, the unemployment rate, etc. The U.S. consumer continues to be very active and that flows through to a host of different parts of the economy, as well as commercial real estate. We have seen a bit of a pullback in business investment. So, it’s a little bit mixed, but given the importance of the U.S. consumer, the fact that they’ve continued to have some faith in the economy has really helped to support the overall economy.
If you think about some of the greatest areas of concern about a recession coming, those would generally be tied to things like international economic growth, trade or manufacturing. Many types of commercial real estate, say, apartment buildings, some office space, are relatively distant from the areas of concern about the global economy.
On the one hand, uncertainty can absolutely give pause to investors. It raises questions about a particular asset’s future, and can affect an investor’s willingness to purchase [a property] or the price. That being said, if you look at the yields on Treasurys and other investible assets, they’ve generally been moving down. To the degree an investor is looking at other investment options, commercial real estate could still be very attractive to investors.
What other factors could affect the market this year?
One of the key drivers for us is the lower interest rate environment we’re in. Our thinking is that really will help commercial real estate values by potentially bringing capitalization rates in tighter or slowing any increases in them. We think that this lower-rate environment really could be a source of strong support for transaction activity.
