Like 2018 before it, 2019 was a record year for commercial real estate (CRE) financings. The Mortgage Bankers Association (MBA) estimates $628 billion of CRE loan closings in 2019, up roughly 8.5 percent from 2018’s $574 billion. Pulling together projections from across and beyond the industry, we’ve isolated three major contributing factors driving CRE activity, and look into what they could mean as 2020 unfolds.
Factor #1: Low-and-Lower Interest Rates
Owing much to trade wars and fear of recession, the Federal Reserve reduced interest rates three times in 2019, with rates ultimately settling at 1.75 percent (well above 2008’s low point of 0.25 percent). With no subsequent adjustment and stated plans to hold steady, interest rates will likely see little to no change in 2020. According to Jamie Woodwell, MBA’s vice president for CRE Research, the Federal Reserve’s three consecutive interest rate cuts were “a shot in the arm” for commercial and multifamily real estate markets in 2019.
Amid the Fed’s rate cuts, the U.S. economy entered its record 121st consecutive month of growth. While some worried this was a sign of a good thing gone on too long, investor confidence, increased transaction volume, rental growth, and other phenomena all mean a recession is unlikely in the near term. If the Fed’s forecast holds true, continued low rates will mean another record year for CRE loan activity — by some estimates, in excess of $700 billion.
Factor #2: Electoral Uncertainty
The U.S. political climate is rife with tension — and, in an election year, with uncertainty. A 2014 study conducted by Princeton University researchers found that “electoral uncertainty induces a decline in G.D.P. portions composed of costly-to-undo investments.” Facing possible changes to economic policy, investors wait until election results are final.
However, analysis of the S&P has shown that only the final year of an incumbent’s eight-year term averages negative returns (around 2.8 percent). Certain regime change adds uncertainty to an election year. With no guarantee of who will win the election, the months surrounding Tuesday, November 3 may see at most a moderate decline in economic activity. Based on historical trends, the ripple effects will not have any significant impact on CRE financing activity.
Factor #3: Baby Boomers as Owners and Millennials as Renters
Increased life expectancy combined with decreased fertility rates means the U.S. population is, writ large, getting older. As we detailed in our recent Senior Housing Boom blog, the number of Baby Boomers aged 65 and over is set to reach an unprecedented peak of 106.8 million in 2030. Many older Americans are living longer, healthier lives and choosing to “age-in-place” vs. moving into a senior rental community. The average age (both predicted and actual) for senior living residents continues to grow, and therefore market expectations for senior housing demand and growth that were inked a mere 10 years ago are no longer accurate. This shift in demand for senior housing has caused an overbuilding of supply and a slow lease-up in many markets. With predicted revenue levels and market stabilization still several years away, senior housing operations may need bridge financing to help them remain on track when newly built facilities do not qualify for permanent financing.
As Generation Z and Millennials age into homeownership range, one analysis suggests that low interest rates could give current renters the opportunity to become single-family homeowners. However, these groups tend to prefer urban environments, and given the historically high $1.5 trillion in student loan debt, this cohort of potential homeowners may not be able to obtain mortgage debt. According to Russ Krivor, CEO of Sovereign Properties, attraction to cities and unpaid loans mean “lower-middle-class millennials and Gen Zers…will likely stay in apartments or single-family rentals for the foreseeable future.” Obstacles to homeownership work in multifamily properties’ favor, and should contribute to high levels of CRE development and financing activity.
2020 Optimism
According to MBA’s Commercial Real Estate Finance Outlook Survey, “market leaders…expect 2020 should be slightly stronger than 2019.” Indeed, 2019’s encouraging CRE trends should give rise to optimism about the year ahead. The unknowns inherent to the future means vigilance remains necessary, but we fully expect 2020 to match — if not exceed — its predecessor.
