Total commercial and multifamily mortgage borrowing and lending in 2023 is expected to fall 5% to $700 billion from $740 billion in 2022, according to the Mortgage Bankers Association.
Multifamily lending alone, included in the total figure, is expected to drop to $393 billion in 2023 — an 11% decline from last year’s expected $439 billion.
Beyond 2023, however, MBA anticipates borrowing and lending will rebound in 2024 to $887 billion in total commercial real estate lending and $483 billion in multifamily lending.
The swing in momentum is tied to the Federal Reserve’s shifting view of the economy and how it responded with increased borrowing rates in 2022, and what it might yet do this year, according to the association.
At the end of 2021, the typical member of the Fed’s Open Market Committee expected the federal funds borrowing rate to end 2023 at 1.6%, the association said. In June that figure had risen to 3.8%. In December it had risen again, to 5.1%.
The Fed’s shifts in outlook were both a response to changing economic conditions but also a cause of change themselves, according to Jamie Woodwell, the association's head of commercial real estate research.
“Commercial real estate markets are not immune to these shifts, and we expect borrowing and lending backed by commercial and multifamily properties to decline again this year,” Woodwell said in a statement. “Uncertainty and volatility around the paths of the economy, interest rates and property valuations will likely continue to cause instability for commercial real estate markets well into this year.”
The association's forecast for commercial real estate finance markets is built on its outlook for the economy and property fundamentals in a period of dislocation caused by the Fed’s fight against inflation.
Inflation remains elevated but is expected to subside slowly through a reduction in the fiscal, monetary, supply chain, war and other stimuli that have pushed it to 50-year highs, according to the association.
“To speed up that decline, however, the Fed is expected to continue to pressure the economy, pushing short-term interest rates and unemployment rates higher in 2023 before easing the fed fund rate in 2024, which should help temper unemployment as well,” the association said.
On the property side, the association forecast that after an abrupt upward shift signaling a higher risk of investment, capitalization rates should begin to decline, driven primarily by the moderation in long-term interest rates.
Property income, with the exception of uncertainty around office properties, should remain solid, according to the association. The group expects net operating incomes to grow an average of 1.4% per quarter over the next three years, helping further buoy property values.
“The combination of increases in both cap rates and NOIs imply a sharp near-term adjustment to property values — in the magnitude of 25% on a year-over-year basis — followed by a return to strong increases as NOIs continue to climb and cap rates recede,” the association said.