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Morning Report: Apartments are the next problem spot for commercial real estate

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Vital Statistics:

Stocks are higher on no real news. Bonds and MBS are up small.

The week ahead will be dominated by the CPI report on Thursday and the PPI on Friday. We will also get consumer sentiment and small business optimism. We will also get mortgage earnings from United Wholesale, Loan Depot and Guild.

Rocket reported second quarter origination volume of 22 billion. This was down 35% compared to the second quarter of 2022. Gain on sale margin fell to 2.67% from 2.92%. Adjusted revenue was $1 billion. For the third quarter, Rocket expects adjusted revenue to decline to a range of $850 million to $1 billion. The company continues to cut costs, and just announced a new CEO.

Apartments are becoming the next headache in the commercial real estate sector. Office has been a disaster post-COVID, but the amount of supply that is under construction is at record levels. This is hard to square with single-family housing inventory that is 25% of 2007 levels, but it is true.

Apartment commercial real estate prices have been supported by soaring rents, however rising interest rates are the problem now. If you look at the NMHC indices, it is hard to get financing for apartment construction now.

The MBA sees commercial and multifamily lending falling to $504 billion this year compared to $816 billion in 2022.

“Higher and volatile interest rates, uncertainty about property values, and questions about some property fundamentals have led to an impasse in property sales and mortgage originations activity this year,” said Jamie Woodwell, MBA’s Head of Commercial Real Estate Research. “Our baseline economic forecast anticipates that interest rates will moderate over the next year and half, helping to break the current logjam in transaction activity and bringing relief to financing costs and property valuations.”

Woodwell continued, “One caveat is that different interest rate paths would lead to different forecast outcomes. Commercial mortgage originations have historically followed property prices – with increases in values pushing mortgage borrowing and lending volumes higher and declines pulling them lower. If interest rates and cap rates fall, as we anticipate, that should help boost values and promote borrowing. If they remain higher for longer, that will suppress activity. The uncertainty about future interest rate paths is a contributing factor to today’s slowdown.”

Sunday Night Futures

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