Commercial Real Estate Forecast Slashed for 2024

The Mortgage Bankers Association has slashed its forecast for commercial real estate production next year and lowered expectations for this year by 12% as it finds delinquencies are continuing to rise.

The forecast released Oct. 19 contained the MBA’s first major change in its 2024 forecast for total and multi-family loan originations. Production for this year was revised downward Aug. 3 by 23% for all loans and 20% for multi-family.

On Oct. 20, the MBA reported that the 30-day-plus delinquency rate was 5.1% for office property loans Sept. 30, up from 4.0% in June, and it was 5.0% for retail loans, up from 4.9%. The 30-day-plus rate was only 0.9% for multifamily loans in September, up from 0.7% in June.

Jamie Woodwell, the MBA’s head of commercial real estate research, said the delinquency rate for commercial real estate has increased four quarters in a row.

The delinquency rate for loans backed by offices now exceeds rates for retail and hotel properties, while the delinquency rates for multifamily and industrial property loans remain below 1%.

“Commercial property markets are working through challenges stemming from uncertainty about some properties’ fundamentals, a lack of transparency into where current property values are, and higher and volatile interest rates,” Woodwell said. “The result has been a slow and steady uptick in delinquency rates, concentrated among loans facing more of those challenges.”

The latest NCUA data, which is for June, shows credit unions have much lower delinquency rates, but they are also rising. The 60-day-plus rate was 0.28% for commercial real estate June 30, up from 0.22% a year earlier. The multi-family delinquency rate was 0.10% in June, up from 0.09% a year earlier.

The MBA’s Oct. 19 forecast said it expects total commercial real estate loan production to reach $442 billion this year, down 46% from 2022, and down 35% from the Aug. 3 forecast of $504 billion for this year.

NCUA data showed credit unions on a similar path this year.

Credit unions produced $14.4 billion in commercial real estate loans from January through June, down 43% from 2022’s first half and the lowest six-month performance since 2020. Mutli-family loans fell 36% in the first half to $3.1 billion.

Among all lenders, the MBA forecast multi-family to fall 41% to $285 billion for 2023, down from its Aug. 3 forecast of $299 billion. Other loans are expected to fall 53% to $157 billion this year.

For next year, the MBA predicted total lending will rise 27% to $559 billion, down 35% from $856 in its Aug. 3 forecast. The MBA said it expects multi-family to rise 19% to $339 billion in 2024, compared with the $452 billion in its Aug. 3 forecast. Other loans are expected to rise 40% to $220 billion in 2024.

“The logjam in the commercial real estate markets that began last summer has remained firmly in place,” Woodwell said.

Reasons for falling demand include the rise and volatility of interest rates, and the low number of transactions making it difficult to evaluate prices.

“Commercial mortgage originations have historically followed property prices, and the uncertainty about the future path of interest rates has been a contributing factor to the current slowdown,” Woodwell said. “If interest rates and cap rates were to fall, that should help boost values and promote borrowing. If they remain higher for longer, as is increasingly likely, that will suppress activity.”

“Unfortunately, those and other factors will likely continue to exert downward pressure on borrowing and lending volumes in the coming quarters,” he said.