According to the Mortgage Bankers Association's third quarter of 2018 Commercial/Multifamily DataBook, as researched by Jamie Woodwell, MBA's Vice President of Commercial Real Estate Research; the overall U.S. economic strength in the first three quarters of 2018 has further tightened the job market.
The unemployment rate fell to 3.7 percent in September and has held steady at that level through November. Job growth has been varied but strong, with 165,000 jobs added in July, 286,000 in August, 119,000 in September, 237,000 in October and 155,000 in November. The number of job openings remains near all-time highs - with 7.1 million open positions in October, accounting for 4.5 percent of all positions.
Commercial Real Estate Fundamentals
Commercial real estate fundamentals were largely stable during the third quarter. Vacancy rates were unchanged from the second quarter for office (16.6 percent vacancy rate) and retail (10.2 percent vacancy rate) properties. The vacancy rate for apartments rose from 4.7 percent to 4.8 percent. Vacancy rates for each of the three property types were 20 basis points above where they had been a year earlier.
Rents rose as well, and were 1.7 percent higher than a year earlier for retail properties, 2.5 percent higher for office properties and 4.5 percent higher for apartment properties.
Commercial property sales volumes were 11 percent higher during the first three quarters of 2018 than during the same period in 2017. The increase was driven by an 86 percent rise in the volume of "entity-level" transactions. Sales of individual properties increased 8 percent and the volume of portfolios changing hands increased 3 percent. Entity-level transactions drove a 31 percent increase in the volume of retail property sales. Sales of apartments rose 12 percent and industrial rose 17 percent. There was a 4 percent decline in office property sales activity.
Borrowing and lending backed by commercial and multifamily properties decreased 3 percent during the third quarter, and was 7 percent lower than a year ago. Rising interest rates took some wind out of the market's sails, with the 10-year Treasury yield starting the quarter at 2.87 percent and finishing at 3.05 percent, and the 2-year Treasury starting at 2.57 percent and ending at 2.81 percent. The CMBS and bank lending markets were the hardest hit. Meanwhile, lending backed by multifamily properties and for the government sponsored enterprises (GSEs) continued to grow.
In October, MBA released its Annual Report on Multifamily Lending, detailing the apartment lending market in 2017. Strong conditions helped fuel a 6 percent increase in multifamily lending in 2017, as lenders provided a record high $285 billion in new mortgages for apartment buildings with five or more units. The market benefited from improving fundamentals, rising property values and low interest rates, and the result was larger loan sizes and record levels of overall borrowing and lending.
Commercial Debt Outstanding
Favorable commercial real estate fundamentals and strong lender demand pulled commercial and multifamily mortgage debt outstanding to a new high. Multifamily mortgage debt continues to lead the pack - accounting for more than half of the total increase - and Fannie Mae, Freddie Mac and FHA remain the key drivers of multifamily mortgage growth. All four of the major lender groups added to the balance of loans they hold.
The level of commercial/multifamily mortgage debt outstanding rose by $45.4 billion (1.4 percent) in the third quarter of 2018 to an all-time high. Total commercial/multifamily debt outstanding rose to $3.32 trillion in the third quarter, surpassing the previous high of $3.27 trillion in this year's second quarter. Multifamily mortgage debt increased $26.1 billion (2 percent) to $1.3 trillion over the same period.