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Commercial Real Estate Mortgage Debt Surges to New Record

Non-Farm Real Estate Rose the Most, $52.3 Billion, in the Second Quarter to a New Peak of $3.27 Trillion
October 1, 2018
Mortgage debt for offices, apartments and other commercial property rose the most in any quarter to a record $3.27 trillion.

Mortgage debt underlying offices, apartments and other non-farm commercial real estate rose the most in any quarter on record to a new high of $3.27 trillion as all major investor groups increased their holdings amid strong economic growth.

The $52.3 billion growth in the second quarter for debt on office, multifamily, retail, industrial and hotel properties outpaced by 1.6 percent the previous record growth from the first quarter, leading to the record total debt as of June 30, according to the Mortgage Bankers Association.

"The four major investor groups all increased their holdings, and multifamily mortgage debt outstanding topped $1.3 trillion for the first time," Jamie Woodwell, the association's vice president of commercial real estate research, said in releasing the data.

Overall demand for commercial real estate is rising, fueled by job growth and early benefits of the new tax law passed in December, as U.S. economic growth rose 4.2 percent in the second quarter, the strongest since 2014. The four major investor groups are bank and thrift; federal agency and government sponsored enterprises; life insurance companies; commercial mortgage-backed securities and other asset-backed securities issuers.

Woodwell added that "strong property fundamentals and values, coupled with still-low mortgage rates and strong loan performance" all support the growth of commercial real estate lending.

Commercial banks hold the largest share of the retail, office, industrial, hospitality and multifamily mortgages, $1.3 trillion, or 40 percent of the total. In the second quarter, banks and thrifts had the largest increase in dollar terms in their holdings of commercial mortgage debt – an increase of $23.9 billion, or 1.9 percent.

Life insurance companies hold $486 billion, or 15 percent of the total. Life insurance companies increased their holdings by $10.6 billion, or 2.2 percent.

Commercial mortgage-backed securities and other asset-backed securities issuers hold $452 billion, or 14 percent of the total. They increased their holdings by $5.7 billion, or 1.3 percent.

While the major groups were upping their holdings, state and local government retirement funds decreased their holdings about 72 percent, according to the Mortgage Bankers.

Separate data released last week from the Federal Reserve shows that real estate investment trusts also shrunk their share of commercial mortgage debt outstanding by about $3.2 billion, or roughly 1.9 percent.

Multifamily mortgage debt made up a huge chunk of the increase with outstanding amounts rising to $1.3 trillion, an increase of $20 billion from the first quarter of 2018, representing a 1.6 percent increase.

Fannie Mae, Freddie Mac and other government-related agencies are the second-largest holders of commercial real estate mortgages, holding $631 billion, or 19 percent of the total – all of it in multifamily mortgages. They increased their holdings by $14.5 billion, or 2.4 percent.

Commercial banks increased their holdings of multifamily mortgage debt by $7.9 billion, or 1.9 percent. Life insurance companies increased by $1.7 billion, or 2.2 percent.

State and local government had the largest decline in their holdings of multifamily mortgage debt, by $1.7 billion, or down 1.9 percent.

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