At this time last year, commercial mortgage brokers were looking for answers to the unfolding COVID-19 pandemic. Phones weren’t ringing. Deals were getting canceled. What was more unsettling was that nobody had experienced a shock similar to COVID-19. The downturn hit every city and every commercial real estate market in the country nearly at once, and it was unclear when the pandemic would end.
Heading into the spring of 2021, the commercial real estate market finds itself on more stable ground, even if the health crisis isn’t over and there remain unanswered questions about the future of particular asset types. “You are going to have people who are busier than they were last year,” says Jim Costello, senior vice president of Real Capital Analytics (RCA). “Even if it’s not perfect, you at least know what we’re dealing with now.”
The Mortgage Bankers Association (MBA) expects 2021 to be a year of modest recovery for the market, with origination-volume gains for all property types. Overall, originations from commercial mortgage bankers are projected to rise 11% year over year to $486 billion. This remains well below the 2019 level, when originations reached $600.6 billion, but 2021 has something that 2020 did not have: a lot more certainty.
“If you look at our macroeconomic forecast, we’re anticipating a good boost to economic activity in the second half of the year,” says Jamie Woodwell, MBA’s vice president of research and economics.
You are going to have people who are busier than they were last year.
Jim Costello, senior vice president, Real Capital Analytics
“You’ve got the rollout of vaccines. That should mean that businesses can reopen and be reenergized,” he says. “You’ve got government stimulus that is working its way through Congress. You’ve got a fair amount of households that have been socking away money during the pandemic.
We should be in a place in the second half of the year where we see a pretty good boost in economic activity. So, all of that really portends well across different property types.”
Woodwell says that the recovery in mortgage origination volumes will depend mostly on whether buyers and sellers come together to make more deals this year. Sales volume, however, has a long way to go before the market returns to normal. If judged in the aggregate, 2020 was a terrible year for commercial real estate deal-making.
According to RCA, last year’s sales transaction volume of $418.8 billion was a nearly 30% drop from the 2019 level of $597.1 billion. RCA data only includes transactions valued at $2.5 million and above.
The pandemic had different effects on different property types. The industrial and self-storage sectors, for example, were helped by social distancing and a flight to the suburbs, which created more demand for warehouse space. In contrast, the pandemic sped up the problems of struggling malls and traditional retailers due to the rise of online shopping.
COVID-19 has created lasting uncertainty for the office sector, which may or may not see a permanent loss in demand as more people work from home. Meanwhile, demand for hotels and apartments have been negatively affected by the pandemic to varying degrees but will likely recover reasonably quickly once the health crisis is over.
“Each one of those stories is going to kind of unfold differently,” Woodwell says. “So, for investors or lenders, the property type has probably never mattered more in terms of both understanding how it is getting through the pandemic and then what things will look like on the other side.”
Generally speaking, money has been available to make deals during the pandemic, particularly in certain segments of the market. The nation’s two largest multifamily financiers, Freddie Mac and Fannie Mae, had record years for bankrolling affordable and mid-tier apartments through lender partners in 2020, originating $83 billion and $76 billion, respectively.
Costello says that overall activity has been picking up since midyear 2020. Aside from the uncertainty in the market, he notes that lockdowns made it physically harder to complete deals in the early months of the pandemic.
“Throughout the year, activity improved because the mechanical issues got resolved to some degree and there was more certainty around the disease,” Costello says. “It improved every month on average to a pretty fantastic December.”
Costello says that deal-making will likely accelerate in 2021, but investors also run the risk of making mistakes. The enthusiasm for certain assets, such as industrial warehouse space, may be running too hot, he says. Likewise, property values are sending mixed messages.
“Price growth was strong a few years back and it has been sliding,” Costello says. “There is a lot of capital out there chasing the same assets, even if that capital isn’t willing to do too much when there is a pandemic around. On the whole, there are still some pressures limiting price growth.”
Costello also notes that the added certainty around the economy and COVID-19 cuts both ways for the commercial real estate market. More certainty will likely make buyers more confident about well-performing properties. But as owners size up the market in 2021, they may choose to walk away from struggling properties.
“Folks will have to clean up their portfolios,” Costello says. “Banks will start to move bad assets off the books and some stuff will start to hit the distressed-sales market.” ●
