Market Commentary

The economy showed more signs of financial healing in the third quarter, according to the Federal Reserve Board’s Flow of Funds Accounts. Commercial lending strengthened as transactions and prices picked up.  Commercial mortgage net lending increased to nearly $80 billion annualized, the strongest since prior to the financial crisis. Commercial banks provided $55 billion, roughly two-thirds of the total net lending.  Life insurance companies increased their net position by the largest amount since the crisis, and net issuance of CMBS was positive for only the second time since 2007.

Homeownership is stabilizing, but weak job market is still holding back both rental and ownership markets.  The home ownership rate held steady for the final three quarters of 2013 at 65.1 percent, after having declined a half-percentage point or more each year since its peak in the mid-2000s (Chart 1).  This tentative stabilization suggests that housing markets may soon move beyond the mortgage crisis and back to a period of more normal recovery and growth.

Market conditions improved across all property types in the fourth quarter.  Strong demand for apartments pushed absorption higher, although a pick-up in new supply tempered the decline in vacancy rates.  Office rents increased, despite the slow decline in office vacancies. 

An upswing in bank lending in the fourth quarter signals higher levels of activity across nonresidential real estate, multifamily residential and real estate construction and development. Bank lending for real estate investment is closely related to trends in transactions and prices.  Recently-released data from the FDIC on bank lending reveal increased lending for investment in nonresidential real estate, multifamily residences, and construction and development.

Familiar themes from 2013 in commercial property markets carried over in the first quarter of 2014:  Apartment markets held firm despite the steady ramp-up of new supply, the office sector continued to recover—gradually—but the retail market lagged behind.

The Single Family Rental (SFR) housing market has grown rapidly since the start of the housing crisis. Home prices have risen sharply, however, especially in some of the markets where institutional investors including several REITs have set up SFR business.  This raises questions about the prospects for the SFR sector.

It has been popular to say that the economy suffered permanent (or at least long-lasting) damage during the financial crisis, and the economy’s new speed limit once recovery was fully underway would be 2 percent GDP growth and nonfarm payrolls rising 160,000 or so per month.

Fundamentals for the multifamily housing sector remain firm, even as new construction comes onto the market. Vacancy rates remain at their lows for the cycle, and rent growth has firmed. Going forward, we anticipate that the pent-up demand for apartments is likely to continue to bolster household formation, which is the ultimate source of demand for multifamily housing.

Solid economic growth and sustained job market gains are translating into recovery in the commercial property markets. The apartment sector continues to thrive despite increasing deliveries of new units, as job growth has spurred the formation of new rental households, boosting demand for apartments.

A healthy job market has been the key to economic recovery, and especially the recovery in commercial real estate markets.  The link between hiring and the demand for office space is particularly obvious, and the impact that rising employment and wages have on consumer spending, retail sales and demand for retail properties is also clear.  Recently we have seen that the strong job market has helped fortify the multifamily market in the face of increasing supply, as the Millenials that are finding new jobs are fueling rapid growth in demand for apartment rentals.