Midyear Pulse Check: U.S. Multifamily Market

Executive Summary

• As concerns over credit availability and a potential recession eventually begin to wane, multifamily is poised to see a significant resurgence in investment activity.
• For the first time since CBRE began polling investors, respondents to CBRE’s Global Investor Intentions Survey in late 2022 said that they would target multifamily properties more than any other property type this year.
• In late 2022, nearly 70% of multifamily investors in the Americas said they expected to keep their allocation to real estate about the same in 2023. Another 20% said they expected it to increase.
• Investors in the Americas had inflation expectations that were more pessimistic than what has transpired in 2023. Most investors expected inflation would peak in 2023 and remain above 4% at year-end. In reality, inflation peaked in mid-2022 and is expected to fall well below 4% in Q4.

For the first time in CBRE’s Global Investor Intentions Survey seven-year history, investors said they were targeting multifamily more than any other property type. Thirty percent of all global investors said that multifamily was their No. 1 target, including 37% of Americas investors. Investors were true to their word, as multifamily has accounted for the largest share of U.S. investment (32%) in H1 2023. However, investment volume across all asset types including multifamily is down significantly this year due to the high cost of capital and macroeconomic uncertainty.

Inflation expectations overblown

Nearly two-thirds of investors predicted inflation would peak in 2023 or later when we conducted the survey in late 2022. However, the Consumer Price Index (CPI) has been steadily falling since peaking at 8.9% in June 2022. It currently stands at 3.7%. CBRE expects annual inflation to end the year at 2.9%, compared with more than half of surveyed investors’ earlier expectations of more than 4%.

Figure 1: CBRE House View

Source: CBRE Research, Q3 2023.

Shelter component of CPI will ensure inflation continues to fall

Expectations that inflation will continue to fall is driven by the CPI’s shelter component. Shelter costs account for the largest portion (43%) of Core CPI, which excludes food and energy prices.

The CPI’s shelter component has two primary metrics: “Owners’ Equivalent Rent of Residences” (this is the amount of rent a homeowner would get for renting out their home at market rates) and “Rent of Primary Residence” (the current cost of rent). Both of these metrics peaked in Q1 2023. Looking at more real-time rent data from CBRE Econometric Advisors, actual rent growth peaked a year earlier in Q1 2022. Given that rent growth has continued to decelerate over the past year, we expect that the CPI’s shelter component will drop over the next 12 to 18 months.

Figure 2: CBRE-Measured Rent Growth vs. CPI-Measured Rent Growth

Note: CPI data presented is through June 2023.
Source: CBRE Research, CBRE Econometric Advisors, Bureau of Labor Statistics, Q2 2023.

Multifamily investors’ concerns

Investors in our year-end 2022 survey expressed four primary concerns: rising interest rates, credit availability, fear of a recession and persistent inflation. Inflation was a less serious threat by midyear. As for the others:

• The Fed will likely leave interest rates at the current range of 5.25% to 5.50% for the rest of the year. This is higher than initial investor expectations for 2023, as only 8% of survey respondents predicted interest rates of more than 5.0% by year-end. CBRE expects the Federal Reserve to begin slashing interest rates in the first half of 2024 with the fed funds rate ending the year between 4.50% and 4.75%.
• Credit availability remains a legitimate concern. More than 90% of respondents to CBRE’s 2023 U.S. Lender Intentions Survey said their underwriting would be more conservative and 68% expected lower originations in 2023. This is consistent with actual market performance so far this year.
• Near-term recession expectations have become much less certain as the year has progressed. While some economists envision a “soft landing” for the economy, CBRE expects a moderate recession to begin in early 2024 as the lagged impacts of tight monetary policy more fully take hold.

Investor preferences

A majority of investors in our survey said they would target certain Sun Belt markets that had the highest rent growth in 2021 and 2022. These are also markets that now have some of the largest pipelines of new supply coming online over the next several quarters, which has suppressed rent growth over the short term. We expect robust rent growth in these markets will resume once supply and demand are better balanced.

As for new opportunities, there are several Midwest and Northeast markets, including Indianapolis and Boston, that provide near-term rent growth potential since they did not have a glut of new construction. These markets offer significant cost savings relative to other areas of the country.

Figure 3: Top investor targets for 2023 vs. top markets for future rent growth

Source: CBRE Global Investor Intentions Survey, Q1 2023.

Looking Ahead

Overall economic indicators, including slower job growth, receding inflation and the likelihood that interest rate hikes will now pause, are a mixed bag relative to investors’ initial expectations. However, these indicators generally favor multifamily investment. As inflation and interest rates further stabilize, we expect greater investment activity over the next 18 months. As the favored asset type for investors, multifamily will likely be the first to benefit.

Original and credit: https://www.cbre.com/insights/briefs/midyear-pulse-check-us-multifamily-market

Total CRE Loans From Banks Hit $3T Even as Originations Cool

New deals have slowed, although Q2 originations were up 23% over the first quarter of 2023.

New reports from the Federal Deposit Insurance Corporation and Mortgage Bankers Association show a somewhat puzzling state of commercial real estate: more than $3 trillion in outstanding loans but commercial and multifamily loan originations down 53% year-over-year in Q2, although up 23% from Q1.

First, the FDIC’s 2023 Risk Review. At the end of 2023 Q1, bank-held CRE loans had exceeded $3 trillion in value. Community banks had 28%, or $865 billion, of the CRE loans on bank balance sheets, “a share that remains outsized compared to their holdings of 15% of total loans.”

The FDIC found that “elevated concentrations in CRE lending” persisted among banks, even with falling valuations and concerns about various types of properties, office especially. The agency wrote, “All FDIC Regions saw a rise in the median CRE loan concentration level compared to a year earlier; exposure remained the heaviest in banks headquartered in the West and the Northeast.”

It also said that four of the five major CRE property types had sound fundamentals coming out of 2022. The remaining one, office, “faced increasing risks through first quarter 2023.”

Industrial saw continued strong demand for warehousing and distribution, with the sector remaining at the end of 2022 “near an all-time low” in vacancy rate. However, going into 2023 amid a weakening of economic conditions, some industrial markets became saturated.

Multifamily property benefited, as it has, from a tight single-family housing market. “Relatively low single-family home affordability kept many would-be first-time homebuyers in the rental pool,” they wrote. “Still, elevated rent levels discouraged some potential renters, and rent growth slowed in late 2022 and into first quarter 2023.”

Retail continued strongly “well into 2023” on the winds of ongoing consumer spending. Lodging saw a recovery because of pent-up consumer demand.

However, by the first quarter of 2023, “98 percent of banks held CRE loans and CRE was the largest loan category for almost half of all banks.” CRE loans held have increased every quarter since the opening of 2013. They comprise a quarter of all loans held by banks and at the end of 2022 were 13% of total banking assets.

But things seem to be cooling, according to the MBA. “Commercial and multifamily mortgage loan originations were 53 percent lower in the second quarter of 2023 compared to a year ago, and increased 23 percent from the first quarter of 2023,” the organization’s Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations said.

Originations for all major property types decreased. “There was a 74 percent year-over-year decrease in the dollar volume of loans for health care properties, a 66 percent decrease for office properties, a 55 percent decrease for retail properties, a 55 percent decrease for industrial properties, a 48 percent decrease for multifamily loans, and a 32 percent decrease for hotel properties,” the report said.

Loan dollar volumes decreased by 69% overall, year over year. “There was a 60 percent decrease for investor-driven lenders, a 49 percent decrease in life insurance company loans, a 23 percent decrease for commercial mortgage-backed securities (CMBS), and a 11 percent decrease in the dollar volume of government sponsored enterprises (GSEs – Fannie Mae and Freddie Mac) loans,” they wrote.

The good news was a 23% increase in originations from Q1. “There was a 37 percent increase in originations for multifamily properties, a 19 percent increase for industrial properties, and a 16 percent increase for office properties,” the report said. “Originations for retail decreased 13 percent and originations for hotel properties decreased 27 percent.”

Original: https://www.globest.com/2023/08/17/total-cre-loans-from-banks-hit-3t-even-as-originations-cool/?kw=Total%20CRE%20Loans%20From%20Banks%20Hit%20%243T%20Even%20as%20Originations%20Cool&utm_source=email&utm_medium=enl&utm_campaign=multifamilyalert&utm_content=20230817&utm_term=rem&oly_enc_id=1683H5280356J4F