MBA: Commercial real estate “fractal,” with contrasts within contrasts

Organization forecasts 11% increase of commercial/multifamily activity in 2021

Jamie Woodwell, vice president of the Mortgage Bankers Association (MBA) Research and Economics Group, described the commercial real estate landscape as “a little bit fractal” as we proceed further into 2021.

That is, he explained, while the pandemic has separated property types into “buckets” when it comes to performance expectations, each of those categories come with further nuances as you zoom closer into the picture.

“We’ve got these differentiations by property type, but then you look within property types and you have some of those same differentiations,” Woodwell said while speaking during the Economic and Commercial Real Estate Outlook at the MBA’s virtual 2021 CREF Convention and Expo. “You can’t really paint, for example, retail broad-brush.”

Retail, as has been well-documented, remains one of the sectors hardest hit by the pandemic, performing worse than any other commercial property type besides lodging since COVID-19 reached the United States. Within the sector itself, however, not every retailer has seen the same magnitude of disruption.

Woodwell referred to data from real estate investment trust Kimco, breaking down the share of the company’s tenants who were able to make rent payments during the middle two quarters of last year. Pet stores, grocery stores and pharmacies led the way with 99% rent collections during both the second and third quarters; at the other end of the spectrum were health clubs, entertainment/gathering establishments and personal services retailers, all below (and in some cases, very far below) 80% during both quarters.

“The more a store sold an actual good that you could go and pick up and take home — and the more essential that good was — the better those stores were doing,” Woodwell said. “What’s really interesting here is that going into the pandemic, if you think about what our conversations were about retail, it was about experiential retail. We were saying that the future lay in just the opposite: that it was more about nail salons and the types of properties where you would go to get an experience or a service [that] would be benefitting in the future. … That’s something that we’re going to have to see how it plays out going forward.”

Office properties, Woodwell continued, face the same types of fundamental questions regarding their usage moving forward, given the uncertainty of how prevalent remote work will be post-pandemic.

“The most important thing for the office sector right now is the lease structures. … The long-term nature of office tends to mean that the impacts from a downturn like this tend to be more muted and sort of strung out longer,” he said. “You see the hit to NOIs (net operating incomes) come later and not be as dramatic as some other property types, but they also then linger a little bit longer, so we’ll be looking at that going forward.”

More stable property types also offer studies in contrast. For example, apartments, despite seeing more stability as a whole during the downturn, have seen notable geographic variation as far as performance. Many large, expensive coastal cities, like New York, San Francisco, Boston and Seattle, saw rents drop annually by at least 3% at the tail end of 2020. Other metros, like Raleigh/Durham, San Diego and Portland, have seen rents essentially unchanged, while yet others, like Sacramento, Memphis, Phoenix and Las Vegas, have seen rents grow by 3% or more in the last year, undeterred by the COVID crisis.

In sum, what we have is a commercial real estate landscape where much still bears constant watching, according to Woodwell and the MBA. And with delivery of multiple COVID-19 vaccines in process throughout the country, the industry’s eyes are on what the potential bounce-back will look like whenever it does come in earnest.

“In both the Dot-com [recession of 2001] and the GFC (Global Financial Crisis), when the unemployment rate started going down at the end of the recession, almost immediately you saw apartment and retail NOIs going positive again,” Woodwell said. “To the point about lease structures, you saw office NOIs not turning down immediately at the onset of the recession, but then not turning back positive a little ways after. … I think it will be really interesting and important to keep an eye on that for this downturn and when the different property types do start to leg back up.”

Despite the ongoing uncertainty, the MBA forecast $486 billion of loans closed by commercial and multifamily mortgage bankers in 2021, an increase of 11% from 2020’s estimated volume of $440 billion. Total multifamily lending alone, which includes some loans made by small and midsize banks not captured in the overall total, is forecast to grow to $323 billion, up 7% from last year’s estimated total of $302 billion.

The MBA predicted further growth in lending volumes in 2022, with commercial/multifamily originations increasing to $539 billion, with $358 billion in total multifamily lending alone.    

“The steep declines in mortgage borrowing and lending seen in 2020 should partially reverse in 2021,” said Woodwell. “The economic rebound MBA anticipates in the second half of the year should bring greater stability to the markets, but with continued differentiation by property type. Much of the path forward will depend on the virus and our confidence and ability to move past it.”


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