Increase in Real Estate Lending in 2024
The CRE sector is grappling with elevated interest rates, an economic slowdown, and stringent credit criteria. The impact of high-interest rates is evident in the performance of loans, posing challenges for refinancing, especially amid valuation difficulties. On the bright side, while the challenges from 2023 may persist to some extent in 2024, the forward yield curves suggest a low likelihood of the U.S. Federal Reserve implementing further rate hikes in 2024.
MBA Key Findings
Multifamily lending alone is set to experience a robust 25% surge, reaching $339 billion in 2024 compared to the previous year’s estimate of $271 billion. The MBA foresees a broader expansion in the CRE lending landscape, with the total expected to climb to $717 billion.
Jamie Woodwell, MBA’s head of commercial real estate research, comments on the market trends, noting that 2023 is likely to be remembered as the slowest year for commercial real estate borrowing and lending in nearly a decade. Woodwell attributes this slowdown to various factors, including the resetting of markets concerning interest rates, property values, and certain property fundamentals. While the MBA anticipates a modest uptick in loan volumes as markets adjust, Woodwell underscores that despite surpassing the levels seen in the previous year, 2024’s borrowing and lending activities are still expected to fall short of those observed in the years leading up to 2017.
Matthews™ Insights and Analysis
Over the past 18 months, the Federal Funds rate has significantly increased by 525 basis points, with a notable 100 basis points rise in 2023 alone. Similarly, the 10-year treasury has experienced a 350 basis points increase over 24 months, with an additional 150 basis points uptick in 2023.
Average pricing has declined by 28% from its peak, and transaction velocity has dropped by 55% to 60%. Remarkably, there has been a continuous decline in year-over-year velocity for six consecutive quarters, marking the longest such period since the Global Financial Crisis.
It’s anticipated that the Federal Funds rate will be reduced by at least 75 basis points, and the 10-year treasury to settle between 350 to 375 basis points by the end of the year. Cap rates are projected to increase by an average of 50 to 75 basis points across all product types. Debt is foreseen to become cheaper by an average range of 0.75% to 1.50%. As per MSCI estimates, transaction velocity is expected to rebound with an increase between 20% to 30%. Additionally, a substantial reduction in the number of brokers in the industry is forecasted, estimating a decline of 15% to 20% by the end of 2024 compared to the peak in 2021.
Conclusion
As the real estate markets undergo shifts and adjustments, the MBA’s optimistic forecast for a 29% increase in CRE loan volume in 2024 brings a sense of anticipation. While challenges and uncertainties persist, the expected surge in multifamily lending and overall commercial real estate activities signals a positive trajectory for the industry. Investors, lenders, and industry stakeholders will be closely monitoring these projections, eager to capitalize on the potential opportunities in the evolving landscape of commercial and multifamily mortgages.
