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2024 Q2 Databook

September 30, 2024 Jamie Woodwell; Reggie Booker

ECONOMY

After growing at a seasonally adjusted annual rate of 1.4 percent during the first quarter of 2024, the US real gross domestic product grew at 3.0 percent during the second quarter.  The growth was driven by increases in consumer spending, private inventory investment, and nonresidential fixed investment.  Through August, retail sales including food services were 2.9 percent higher in nominal terms than a year earlier, with food services and drinking places up 5.3 percent, general merchandise store up 3.1 percent, health and personal care up 2.7 percent and clothing up 2.6 percent.  Sales were down by 3.1 percent at sporting goods stores and 5.1 percent at furniture stores.

The employment market has shown signs of loosening, with monthly seasonally adjusted employment gains of 118,000 in June, 89,000 in July and 142,000 in August and an unemployment rate that has grown from 3.8 percent in August 2023 to 4.2 percent in August 2024. In August, average hourly earnings for all employees on private nonfarm payrolls increased by
14 cents, or 0.4 percent, to $35.21.

As Jerome Powell said during his September 18 press conference, “Our economy is strong overall and has made significant progress toward our goals over the past two years. The labor market has cooled from its formerly overheated state. Inflation has eased substantially from a peak of 7 percent to an estimated 2.2 percent as of August. We are committed to maintaining our economy’s strength by supporting maximum employment and returning inflation to our 2 percent goal.”

In that light, the Fed lowered its benchmark Fed Funds Rate by 50 basis points, to a target range of 4.75 percent to 5.0 percent.  Given the recent drop in inflation, the real (taking inflation into account) Fed Funds rate prior to the action would appear to be highly restrictive.  The cut is the first move in what is expected to be a steady effort to bring short term rates closer to what members of the FOMC expect to be a much lower long-term rate.

The Fed’s actions target the short-end of the yield curve, and the impact was immediate.  The longer-end of the curve had anticipated Fed loosening – although not necessarily the specific timing or degree – with the 10-year Treasury yield falling from an average of 4.8 percent in October 2023 to 3.87 percent in August 2024.  After the decision, the 10-year yield adjusted slightly upward.

CRE FUNDAMENTALS

Commercial real estate fundamentals continue to evolve, with each property type, market, submarket, class, vintage and more having a large impact.  Every property is unique and is experiencing its own situation, so broad brushstrokes do not apply.

OFFICE

All eyes remain on office properties.  According to CBRE, approximately 80% of organizations have a return-to-office (RTO) policy, with 60% wanting employees to work in the office three or more days per week, but only 51% of employees in the office that frequently.  Seventy-three percent of occupiers believe their workplace is effective.  With Amazon’s recent announcement of a return to five days in the office for some staff, it is clear that an equilibrium in office conditions is still waiting on the decisions of myriad companies and their employees, and their eventual impact on leases. 

According to Newmark, more than half of all leases predate the onset of the pandemic.

MULTIFAMILY

After years of underdevelopment, the multifamily market is experiencing a deliveries boom, with an annual pace of 740,000 units delivered in August.  The pace of deliveries coupled with a slowdown in new starts has brought the number of multifamily units under construction down from 1 million in August 2023 to 850,000 in August 2024 – still a high number by historical standards.  Much has been made of the fall off in permits (451,000 in August 2024, down from 542,000 a year earlier) and starts (333,000 in August 2024, down from 355,000 a year earlier) but both rates remain relatively robust.  

The new supply has taken pressure off rent growth.  After growing by double digits in 2022 and 2023, as the pandemic upended housing markets, rents on newly leased units fell by 1.1 percent between Q2 2023 and Q2 2024.  That has brought the year-over-year rise in overall rents to 3.9 percent in Q2 2024, down from 6.4 percent a year earlier.  Overall rents fell between Q1 and Q2 2024.

While new supply coupled with a fall-off in the demand caused by the coming of housing-age of Millennial generation has brought relief to pandemic-era rent increases, particularly for many “middle-income” households, many lower-income households still do not earn enough to cover the costs of building and maintaining housing.

Given the time to plan, permit and begin development, new construction activity tends to lag market conditions.  Even so, every major property types is seeing a fall-off in the value of new construction put-in-place.

CRE SALES AND VALUES

After falling by 52 percent from 2022 to 2023, sales of major property types of CRE fell another 6 percent in the first half of 2024 compared to a year earlier.  First half 2024 sales were essentially flat to a year earlier for apartment and office properties and down 10 percent for retail and 17 percent for industrial.

Given the lack of transactions, CRE prices and cap rates remain cloudy.  In 2022 and 2023, property values fell by 3.1 percent and 4.5 percent according to Real Capital Analytics, by 13.2 percent and 9.0 percent according to Green Street Advisors, and rose by 1.3 percent in 2022 and fell by 7.9 percent in 2023 according to NCREIF.  Results for the first half of 2024 are equally varied.  It is likely we will not have clarity until the volume of sales picks up appreciably.

MORTGAGE ORIGINATIONS

Borrowing and lending backed by commercial real estate remained subdued in the second quarter. Most capital sources remain ready, willing and able to lend on properties that can support a loan. Driven by growth in the single-asset single-borrower markets, originations for CMBS grew significantly during the quarter.


Commercial and multifamily mortgage loan originations increased 3 percent in the second quarter of 2024 compared to a year ago and increased 27 percent from the first quarter of 2024.  Originations in the second quarter of 2024 varied across the different property types. There was a 172 percent year-over-year increase in the dollar volume of loans for hotel properties, a 77 percent increase for industrial properties, and a 50 percent increase for health care properties. Retail property originations decreased 7 percent, multifamily properties decreased 14 percent, and there was a 29 percent decrease for office properties.

Among investor types, the dollar volume of loans originated for commercial mortgage-backed securities (CMBS) increased by 154 percent year-over-year. There was a 17 percent increase for investor-driven lenders, an 11 percent increase for life insurance company loans, but a 26 percent decrease in loans for depositories, and a 20 percent decrease for government sponsored enterprises (GSEs – Fannie Mae and Freddie Mac) loans.

Total commercial and multifamily mortgage borrowing and lending is expected to finish the year at $539 billion in 2024, which is a 26 percent increase from 2023’s total of $429 billion. 

Multifamily lending alone (which is included in the total figures) is expected to rise to $297 billion this year – a 21 percent increase from last year’s estimate of $246 billion. MBA anticipates borrowing and lending next year will increase to $665 billion in total commercial real estate lending, with $390 billion of that total in multifamily lending.

The recent moderation in interest rates, coupled with the large volume of loans maturing in coming quarters, should prompt an uptick in mortgage borrowing from the low levels we’ve seen over the last two years. The exact timing of the bounce-back will depend on how quickly property owners jump on long-term interest rates that are down significantly from where they were a year ago.

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 – with many investors holding off selling or refinancing a property in the hope of lower rates. With longer term rates now lower, many of those players are likely to take action. Investors looking to shorter-term financing can also take solace in the Federal Reserve’s actions to begin to bring down the short end of the curve.

MORTGAGE DEBT OUTSTANDING

Commercial mortgage debt outstanding grew at a modest pace in the second quarter. Every major capital source increased its holdings of mortgages backed by income-producing properties, but the growth was mixed, with life insurance companies increasing their holdings by 1.8 percent and banks increasing their holdings by 0.2 percent.

Commercial banks continue to hold the largest share (38 percent) of commercial/multifamily mortgages at $1.8 trillion. Agency and GSE portfolios and MBS are the second-largest holders of commercial/multifamily mortgages (22 percent) at $1.02 trillion. Life insurance companies hold $735 billion (16 percent), and CMBS, CDO and other ABS issues hold $609 billion (13 percent).

In the second quarter, life insurance companies saw the largest gains in dollar terms in their holdings of commercial/multifamily mortgage debt – an increase of $12.8 billion (1.8 percent). Agency and GSE portfolios and MBS increased their holdings by $8.1 billion (0.8 percent), CMBS, CDO and other ABS issues increased their holdings by $5.4 billion (0.9 percent), and bank and thrifts increased their holdings by $2.9 billion (0.2 percent).

With fewer loans paying off, CRE mortgage balances have continued to grow in recent quarters despite a marked fall-off in the volume of loans being made. We anticipate that long-term interest rates, which are significantly lower than a year ago, will help increase origination activity in coming quarters – boosting both new loans coming onto the books and the payoff of existing ones.

LOAN PERFORMANCE

The delinquency rate for most property types declined last quarter, with the exception of loans backed by office properties, which experienced an increase. Even so, the pace of increase in the delinquency rate for office property loans appears to have slowed in recent quarters.

Commercial properties are working through changes in interest rates, property values, and the fundamentals of some properties. Each property and loan faces a unique mix of conditions depending on that property’s type and subtype, market and submarket, owner, vintage, deal terms and more. As more loans mature throughout the year, more properties will be adjusting to these new conditions.

The balance of commercial mortgages that are not current decreased slightly in the second quarter of 2024.

  • 97.0% of outstanding loan balances were current or less than 30 days late at the end of the quarter, up from 96.8% in the first quarter of 2024. 
    • 2.5% were 90+ days delinquent or in REO, unchanged from the previous quarter.
    • 0.2% were 60-90 days delinquent, down from 0.3% the previous quarter.
    • 0.4% were 30-60 days delinquent, unchanged from the previous quarter.
  • The share of loans that were delinquent increased for office properties and decreased for other property types.
    • 7.1% of the balance of office property loan balances were 30 days or more days delinquent, up from 6.8% at the end of last quarter.
    • 5.8% of the balance of lodging loans were delinquent, down from 6.3% the previous quarter.
    • 4.5% of retail balances were delinquent, down from 4.7%.
    • 1.1% of multifamily balances were delinquent, down from 1.2%.
    • 0.8% of the balance of industrial property loans were delinquent, down from 1.2%.

Delinquency rates increased for bank loans and Freddie Mac loans, as well as those held in CMBS. Delinquency rates decreased for loans held by life companies and were unchanged for Fannie Mae.


Based on the unpaid principal balance (UPB) of loans, delinquency rates for each group at the end of the second quarter of 2024 were as follows:

  • Banks and thrifts (90 or more days delinquent or in non-accrual): 1.15 percent, an increase of 0.12 percentage points from the first quarter of 2024;
  • Life company portfolios (60 or more days delinquent): 0.43 percent, a decrease of 0.09 percentage points from the first quarter of 2024;
  • Fannie Mae (60 or more days delinquent): 0.44 percent, unchanged from the first quarter of 2024;
  • Freddie Mac (60 or more days delinquent): 0.38 percent, an increase of 0.04 percentage points from the first quarter of 2024; and
  • CMBS (30 or more days delinquent or in REO): 4.82 percent, an increase of 0.47 percentage points from the first quarter of 2024.

The greatest focus continues to be on office loans, which make up about $740 billion of the $4.7 trillion of commercial mortgage debt outstanding. The CRE market is large and diverse, with significant differences by property type and subtype, market and submarket, borrower, lender, vintage, and more. All of those differences come into play in terms of how an individual loan may perform.