2024 Q3 Databook
December 24, 2024
Jamie Woodwell; Reggie Booker
ECONOMY
The US economy continued its hot streak during the third quarter.
Real gross domestic product grew at a real seasonally adjusted annual rate (SAAR) of 3.1 percent, following a rise of 3.0 percent in Q2. Consumers were key to the growth, with personal consumption growing at a real SAAR of 3.7 percent. Growth in business investment in equipment and intellectual property slightly outpaced the fall-off in investment in residential and non-residential property.
The labor market remains strong, even as the extreme tightness of the last few years wanes. Business added an average of 267,000 jobs per month in Q1 of 2024, 147,000 in Q2, 159,000 in Q3 and an average of 132,000 across October and November. After starting the year at 3.7 percent, the unemployment rate has bounced between 4.1 percent and 4.3 percent since May, coming in at 4.2 percent in November. The number of open jobs has declined from more than 12 million in March of 2022 to 7.7 million in October 2024, much closer to the pre-pandemic 7.2 million of January 2020.
The strong labor market has supported wages, which have continued to climb – and outpaced inflation. Nominal November average hourly earnings were 4.0 percent higher than a year earlier.
Inflation, as measured by the year-over-year change in the core consumer price index (which excludes food and energy), started 2024 at 3.9 percent. It is now down to 3.3 percent but has been “stuck” in that range since June.
Based on the drop in the rate of inflation, the Federal Reserve has lowered the target Fed Funds rate in recent meetings – including an additional 25 basis point cut in December that brought the rate to a range between 4.50 percent and 4.75 percent. As they balance signs of a still strong labor market with those of stubborn inflation, opinions both inside and outside the Fed are mixed about where they may go from here.
Longer-term interest rates have already baked-in expectations for future Fed cuts and are balancing an array of additional considerations, including future economic growth, inflation rates, federal budget deficits and more. The yield on the Ten-year Treasury bond averaged 4.06 percent in January, fell to 3.72 percent in September and has since climbed back into the 4s, averaging 4.36 percent in November.
PROPERTY FUNDAMENTALS
Commercial property fundamentals are varied – by property type and subtype, geographic market and submarket, property quality and age and a host of other factors.
Office properties continue to attract the greatest attention. CBRE reports that net absorption accelerated during Q3, “marking the second straight quarter of positive demand” and helping the vacancy rate stabilize. Differences are significant between and within markets but investors and lenders are increasingly identifying office properties that can support investment.
Retail property conditions are strong. JLL reports that Q3 was “the 15th straight quarter” of positive net absorption, pushing availability to 4.7 percent and vacancy to 4.1 percent. Vacancy rates range from 8.7 percent for malls to 5.9 percent for neighborhood centers to 4.7 percent for strip centers and 2.5 percent for “general retail,” which accounts for more than half of the sector’s square footage.
Industrial markets are working through a period of weaker demand and stronger supply. Colliers reports that industrial vacancies rose 19 basis points to 6.6 percent during the quarter. New supply of 76 million square feet during Q3 was the lowest since early 2021 while net absorption was 39 million square feet. Despite the mismatch, the difference is the smallest the market has seen since 2022. During their Q3 earnings call, Timothy D. Arndt, Chief Financial Officer of Prologis noted, “While occupancy and rent softened against the backdrop of positive yet subdued demand, we continue to deliver impressive net effective rent change due to the still powerful lease mark-to-market embedded in our portfolio.”
The multifamily market is also working through a supply boom. Developers completed apartments at a seasonally adjusted annual rate of 715,000 units in August, 676,000 in September and 615,000 in October. That compares to deliveries of 438,000 in 2023, 359,000 in 2022 and 363,000 in 2021. Since 1990, an average of 265,000 multifamily units have been completed each year.
That new supply is having a direct impact on rents. According to the Bureau of Labor Statistics, average rents (including newly signed and in-place) rose 4.6 percent between October 2023 and 2024, down significantly from 7.2 percent a year earlier. In Q3, newly signed rents were just 1 percent higher than a year earlier. The multifamily pipeline remains strong, with more than 800,000 units under construction. New permits and starts have fallen from the highest levels since the mid-1980s but remain robust.
SALES AND VALUES
Commercial property sales transaction volume has been subdued since mid-2022. Sales volume in Q3 2024 was 28 percent lower than in Q3 2023, which was 50 percent lower than Q3 2022, which was 13 percent lower than Q3 2021. It should be noted that the Q3 2021 volume was nearly three times what it had been a year earlier.
The lack of transaction activity has brought uncertainty to property valuations, as good sales comparables are hard to come by. September commercial property values were measured as down 10.5 percent from a year earlier based on data from the Federal Reserve, down 3.1 percent according to Green Street Advisors (GSA) and down 1.5 percent according to MSCI Real Capital Analytics (RCA). Since their 2022 peaks, values are down 19 percent according to GSA, 12.5 percent according to the Federal Reserve and 12.1 percent according to RCA.
Each data source measures property values in a different way and covers a different universe of properties and the different results from the different series can be seen as evidence of the heterogeneity of the CRE property market. As sales transaction activity picks up, greater clarity should come to values.
MORTGAGE ORIGINATIONS
After a slow start to the year, borrowing and lending backed by commercial real estate properties picked up during the third quarter. Lower interest rates were a key driver of the increase, with the yield on the Ten-year Treasury bond dropping during the quarter from an average of 4.31 percent in June to 3.72 percent in September. Long-term rates have increased more recently, which could slow last quarter’s momentum.
Commercial and multifamily mortgage loan originations increased 59 percent in the third quarter of 2024 compared to a year ago and increased 44 percent from the second quarter of 2024. Originations in the third quarter of 2024 varied across the different property types. There was a 510 percent year-over-year increase in the dollar volume of loans for health care properties, a 99 percent increase for hotel properties, an 82 percent increase for retail properties, a 57 percent increase for industrial properties, and a 56 percent increase for multifamily properties. Office property originations decreased 3 percent.
Among investor types, the dollar volume of loans originated for commercial mortgage-backed securities (CMBS) increased by 260 percent year-over-year. There was a 69 percent increase for depository loans, a 62 percent increase for investor-driven lender loans, a 31 percent increase in loans for life insurance companies, and a 28 percent increase for government sponsored enterprises (GSEs – Fannie Mae and Freddie Mac) loans.
Each property and loan is unique and faces a different situation depending on its property type, market, submarket, vintage, business plan and more. All those factors will play a role in the volume of borrowing/lending in coming quarters.
MORTGAGE DEBT OUTSTANDING
Every major capital source for commercial mortgage debt increased its holdings of mortgages during the third quarter of 2024. Life insurance companies led the way, accounting for 44 percent of the quarterly increase and boosting their commercial mortgage holdings by nearly three percent. That increase contrasts with banks, which increased their balances of CRE mortgages during the quarter by only 0.3 percent. For the ninth quarter in a row, aggregate balances backed by multifamily properties increased more than those backed by other property types.
The level of commercial/multifamily mortgage debt outstanding increased by $47.7 billion (1.0 percent) in the third quarter of 2024. Total commercial/multifamily mortgage debt outstanding rose to $4.75 trillion at the end of the third quarter. Multifamily mortgage debt alone increased $29.8 billion (1.4 percent) to $2.12 trillion from the second quarter of 2024.
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 $1.03 trillion. Life insurance companies hold $757 billion (16 percent), and CMBS, CDO and another other ABS issues hold $619 billion (13 percent).
In the third quarter, life insurance companies saw the largest gains in dollar terms in their holdings of commercial/multifamily mortgage debt – an increase of $21.2 billion (2.9 percent). Agency and GSE portfolios and MBS increased their holdings by $12.3 billion (1.2 percent), CMBS, CDO and other ABS issues increased their holdings by $9.6 billion (1.6 percent), and bank and thrifts increased their holdings by $6.1 billion (0.3 percent).
Looking solely at multifamily mortgages in the third quarter of 2024, agency and GSE portfolios and MBS hold the largest share of total multifamily debt outstanding at $1.03 trillion (49 percent), followed by banks and thrifts with $630 billion (30 percent), life insurance companies with $244 billion (12 percent), state and local government with $99 billion (5 percent), and CMBS, CDO and other ABS issues holding $68 billion (3 percent).
The $29.8 billion increase in multifamily mortgage debt outstanding from the second quarter of 2024 represents a quarterly gain of 1.4 percent. In dollar terms, agency and GSE portfolios and MBS issues saw the largest gain – $12.3 billion (1.2 percent) – in their holdings of multifamily mortgage debt. Life insurance companies increased their holdings by $10.0 billion (4.3 percent), and bank and thrifts increased by $4.7 billion (0.8 percent).
LOAN PERFORMANCE
The share of the balance of delinquent commercial mortgages increased for every major capital source during the third quarter of 2024. The increases varied by capital source and were driven by the particularities of each individual loan and property. Stresses differ by property type and subtype, geographic market and submarket, loan type and vintage, borrower type and more.
MBA’s quarterly analysis looks at commercial delinquency rates for five of the largest investor-groups: commercial banks and thrifts, commercial mortgage-backed securities (CMBS), life insurance companies, and Fannie Mae and Freddie Mac. Together, these groups hold more than 80 percent of commercial mortgage debt outstanding. MBA’s analysis incorporates the measures used by each individual investor group to track the performance of their loans. Because each investor group tracks delinquencies in its own way, delinquency rates are not comparable from one group to another. As an example, Fannie Mae reports loans receiving payment forbearance as delinquent, while Freddie Mac excludes those loans if the borrower is in compliance with the forbearance agreement.
Based on the unpaid principal balance (UPB) of loans, delinquency rates for each group at the end of the third quarter of 2024 were as follows:
- Banks and thrifts (90 or more days delinquent or in non-accrual): 1.24 percent, an increase of 0.09 percentage points from the second quarter of 2024;
- Life company portfolios (60 or more days delinquent): 0.46 percent, an increase of 0.03 percentage points from the second quarter of 2024;
- Fannie Mae (60 or more days delinquent): 0.56 percent, an increase of 0.12 percentage points from the second quarter of 2024;
- Freddie Mac (60 or more days delinquent): 0.39 percent, an increase of 0.01 percentage points from the second quarter of 2024; and
- CMBS (30 or more days delinquent or in REO): 5.15 percent, an increase of 0.33 percentage points from the second quarter of 2024.
According to MBA’s Quarterly CREF Loan Performance Survey, delinquency rates for commercial mortgages backed by office properties continued to increase during the third quarter but declined for loans backed by lodging, retail and industrial properties. The commercial mortgage market is large and diverse, covering a range of property types, sizes and ages, geographic markets and submarkets, borrower types, vintages and more. Each of those differences is affecting loan performance, some to the good and some to the bad.
The balance of commercial mortgages that are not current increased slightly in the third quarter of 2024.
- 96.8% of outstanding loan balances were current or less than 30 days late at the end of the quarter, down from 97.0% the previous quarter.
- 2.7% were 90+ days delinquent or in REO, up from 2.5% the previous quarter.
- 0.3% were 60-90 days delinquent, up from 0.2% the previous quarter.
- 0.3% were 30-60 days delinquent, down from 0.4% the previous quarter.
- The share of loans that were delinquent increased for some property types, particularly office, and decreased for industrial, lodging and retail properties.
- 7.8% of the balance of office property loan balances were 30 days or more days delinquent, up from 7.1% at the end of last quarter.
- 5.6% of the balance of lodging loans were delinquent, down from 5.8% the previous quarter.
- 3.8% of retail balances were delinquent, down from 4.5%.
- 1.2% of multifamily balances were delinquent, up from 1.1%.
- 0.6% of the balance of industrial property loans were delinquent, down from 0.8%.
MBA's CREF Loan Performance survey collected information on commercial and multifamily mortgage portfolios as of September 30, 2024. This quarter’s results build on similar surveys conducted since April 2020. Participants reported on $2.6 trillion of loans in September 2024, representing 56 percent of the total $4.7 trillion in commercial and multifamily mortgage debt outstanding (MDO).