Fresh off the Philadelphia Eagles’ first Super Bowl victory, a group of Dechert attorneys and 3,500 of our industry colleagues descended on San Diego for the Mortgage Bankers Association (MBA) CREF/Multifamily Housing Convention & Expo. While those of us on the cross-country flight from Philadelphia were in a particularly jubilant mood, it was clear from the conference that the commercial real estate finance industry was also ready to keep the party going.
With few vocal exceptions, the mood of attendees at the conference was unbridled optimism for 2018, with few bumps seen in the immediate future. One of the highlights of the conference was the opening session featuring the MBA’s Economic Outlook and CREF Market Forecast Release. The MBA expects that new commercial loan originations will decline 3% from record highs in 2017 to $549 billion, and will stay generally steady through 2019.
Overall, fundamentals in the commercial real estate industry and the global economy remain strong. The MBA expects the global economy to continue slow, but steady, growth over the next several years, fueling the real estate and finance industries. In the U.S., the MBA forecasts that GDP growth will slowly decline over the next three years, but will remain at or above 2%, and that inflation will increase marginally from 2.1% in 2018 to 2.8% in 2020. The MBA also expects that unemployment, which is at historic record lows, should remain at or below 4% over the next 3 years. While forecasting that the current state of the economy will continue for the foreseeable future will not make any headlines, given where we are in the economic and real estate cycles, three years of continued growth in the economy is an almost unprecedented forecast.
The most immediate and concerning issue currently facing the industry, and the issue addressed most frequently at the conference, was rising interest rates. The MBA forecasts that the Fed Funds rate will more than double from 1.375% at the end of 2017 to 3.125% in 2020. The 10-year treasury rate is also forecast to rise from 2.4% at the end of 2017 to 3.7% in 2020. While the rise in interest rates may create some headwinds in the future, interest rates should remain relatively low on a historic basis, and many are predicting that increased interest rates will not pose a significant drag on the commercial real estate finance industry.
Despite the optimism, there are some potential concerns. The personal savings rate has dropped close to historic (read 2007) lows of 2.4%. While overall inflation has remained relatively low, home prices have grown at a significantly faster rate than wage increases. If this trend continues, one could expect increased pressure on consumers. On the commercial side, real estate property values, rent growth and net operating incomes have all begun to slow, and in some cases decline, while interest rates have begun to rise. The end result could be lower property transaction volume in 2018, and as a result fewer financing opportunities.
On the CMBS front, panelists on the Future of CMBS and CRE Capital Markets remained generally optimistic about 2018, but expect overall CMBS volume to decrease from 2017. Leverage and loan metrics have remained relatively stable, and lenders have maintained discipline throughout the current cycle, which will (hopefully) lead to continued stability in the future. Some lenders expressed concern that growing competition may cause a deterioration in credit quality over the next year, which may be an issue to watch as the year progresses. Many of the themes from the CREFC conference were also expressed in San Diego, including the competitiveness of CMBS against other financing sources, and how to improve the borrower experience. The GSEs have taken a large share of the multifamily market away from CMBS lenders after the downturn and it appears that share will only continue to grow in the future.
As conference season winds down, it’s time to head back to our desks and put into action what we all said we would do at the conferences. We at Crunched Credit share the optimism of many in the industry for 2018. Let’s give ourselves one final pat on the back for a great 2017 and get back on the road for 2018. The sun is shining, the top is down, the foot is on the pedal, and our hair (well, not mine) is whipping through the air. Here’s to hoping the storm clouds stay over the horizon through 2018. Fly Eagles fly!