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MBA Forecasts a Dip in Mortgage Originations

Some of the headwinds that will create a drag on originations are rising interest rates and slowing NOI growth.

Lenders facing stiff competition to place capital may face an even tougher road ahead given the latest forecast from the Mortgage Bankers Association that is predicting a 2 percent decline in originations in 2018.

Last year was a record year for commercial and multifamily mortgage originations at $530 billion. “We’re anticipating that 2018 will be down just a little bit from 2017, but we are still expecting a strong year,” says Jamie Woodwell, vice president in the MBA’s Research and Economics group. The MBA Forecast calls for commercial and multifamily mortgage originations to fall to $519 billion in 2018 followed by a further decline to $513 billion in 2019.

Some of the headwinds that will create a drag on originations are rising interest rates and slowing NOI growth, notes Woodwell. The 10-year Treasury has risen about 50 basis points this year and is currently hovering just below 3 percent. “We do anticipate that there will be a slow movement up in rates through the remainder of the year,” he says.

Those factors along with near peak pricing have also contributed to the slowdown in property sale transactions in 2017, which has carried into 2018. According to Real Capital Analytics, the most recent sales data available for February shows that transaction volume reached $23.8 billion, which is down 10 percent year-over-year and the lowest level for any month since 2013.

“We’ve enjoyed roughly a decade of the trifecta—low interest rates, declining cap rates and strong fundamentals, which has been responsible for driving continually-higher prices and financing opportunities,” says Hilary Provinse, executive vice president and head of mortgage banking at Berkadia. Now interest rates are increasing and cap rates are steadying, leaving only NOI growth to support prices, she says. NOI growth has continued across property types and a few measures indicate that prices are continuing to increase, albeit more slowly. “While the market may not accelerate as quickly, it also doesn’t seem likely to go too far in reverse at this point,” she adds.

Decline adds to competitive pressure

Although there is always some ebb and flow within individual property sectors, the expected decline in mortgage originations will likely be relatively widespread across different property types, adds Woodwell. The MBA also is forecasting that multifamily lending will drop 3 percent this year from $264 billion in 2017 to $257 billion followed by another slight decline to $256 billion in 2019.

Even flat lending activity could put more pressure on what remains a highly competitive lending market. “Over the last few years we have seen strong appetite from lenders to place money in commercial and multifamily mortgages. We expect that to continue in 2018. So, lenders will be working hard against one another to compete and find the right deals,” says Woodwell.

According to RCA, GSEs were the top lenders for conventional loans in 2017.

Lenders tweak growth strategies

Yet despite the forecast for a lower origination volume, lenders remain optimistic that they can outperform. “We saw a slight decline in New York metro area originations over the last two quarters, but have since seen an uptick and stabilization of originations,” says Joseph M. Murphy Jr., president and CEO of Country Bank in New York City. The rising rate environment incentivized borrowers to lock fixed rate mortgages in 2017, while low cap rates and high pricing in a real estate market seeing softening rents and retail issues has also steered investment down slightly, adds Murphy.  

Country Bank originated about $125 million in commercial real estate/multifamily loans in 2017 and the bank hopes to grow its portfolio by about 10 percent this year. Although Murphy agrees with the MBA forecast that originations will be down slightly in the broader market, he hopes to achieve growth by focusing on relationship management, providing more personal service and flexibility for both existing and prospective borrowers. Another concern for lenders is that competition will squeeze profit margins. “We see competitors unable to charge rates at increases comparable to the Fed’s rate hikes,” he says.

“As a lender, we need to stay disciplined and avoid the temptation to chase deals down in credit and/or pricing,” adds Provinse. “Instead, we’re redoubling our efforts to differentiate ourselves with best-in-class customer service and certainty of execution.” So far, Berkadia’s year-to-date lending volumes have been fairly consistent with 2017.

PGIM Real Estate Finance placed $14.8 billion in debt financing globally last year, including its general account, third party business and agency lending. “We are optimistic that we can push that to $15 billion this year,” says Paige Hood, chief investment officer at PGIM Real Estate Finance.

The company plans to target growth in international markets. In the U.S., PGIM plans to focus on expanding its agency business on the West Coast, industrial lending in primary markets and core plus opportunities in secondary markets. “We had our biggest year internationally last year and we hope to continue to grow that business,” says Hood. In addition, PGIM has been more willing to take on larger loans, which will help boost its lending volume overall.

“If we can do more than $15 billion, we would love to do that,” says Hood. “But if the market doesn’t allow it, we would rather come up a little short than compromise our credit standards or take pricing levels that we find unattractive.”

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