A new report on commercial real estate by the Mortgage Bankers Association resembles the medical record of a patient recovering from a serious illness who occasionally relapses.
Most metrics used to measure the performance of commercial real estate, which is defined as revenue-producing property, are trending upward but falter most every time there’s a blip in the national economy.
Mortgage delinquencies, vacancy rates, rents and the pace of lending all seem to be getting better.
While commercial real estate in the Albuquerque metro area has painfully lagged the slow national recovery, the findings of the Washington, D.C.-based MBA’s Commercial Real Estate/Multifamily Finance DataBook for the first quarter still have relevance.
“This is a forecast of what is coming for Albuquerque,” said Peter Gineris, senior vice president of debt and structured finance at commercial real estate services firm CBRE’s Albuquerque office.
Continued job losses in the metro, perversely persistent for the better part of seven years, have been harsh on the commercial property types of office and industrial, but less so on retail and multifamily or apartments.
Albuquerque’s commercial real estate market isn’t really conspicuously bad although sometimes it can seem that way, Gineris said.
Part of the image problem is that metros in neighboring Arizona, Colorado and Texas have among the strongest markets in the country, giving us something of an inferiority complex. Look beyond our neighbors and there are large sections of the country where commercial real estate is also languishing, he said.
Take as an example rental and vacancy rates for the office market, which is the most troubled commercial property type in Albuquerque.
Since early 2011, the MBA report say the average asking lease rate increased nationwide by 6 percent to $29.28 a square foot in the first quarter, while the average vacancy rate dropped from 17.6 percent in early 2011 to 16.8 percent in the first quarter.
“Overall asking rents for office space in the Albuquerque area have essentially remained flat since 2011,” said Ken Schaefer, director of brokerage services at Colliers International’s Albuquerque office.
“A stubborn vacancy rate holding above 18 percent since 2011 has increased landlord competition for tenants, keeping rates in a very tight range,” he said.
The first quarter’s average asking lease rate in Albuquerque was $16.19 a square foot, a discount of 42 percent from the national average of $29.28, he said, adding, “Even our Class A asking rates are 28 percent below the overall national rate.”
Strange to think that Albuquerque’s Class A office buildings – Albuquerque Plaza in Downtown, for example, or the Park Square buildings in Uptown – command well below average rents from a national perspective.
The MBA’s Finance DataBook, released last week, covers one of those blip periods in the national economy.
The subdued performance in the first quarter, when the real gross domestic product or GDP shrank by 1 percent, largely resulted from sustained bitterly cold temperatures in the Northeast. The MBA report forecasts the national economy will show decent improvement during the rest of the year.
Weakness in single-family housing has been a drag on the national economy, reflecting the trend of younger households continuing to rent rather than purchase. Consumer spending fell off a little in the first quarter, but remained close to its highest level since 2010.
Falling delinquency rates on commercial real estate loans result both from a generally improving economy and from lenders cleaning up their portfolios of long-standing delinquent properties, Gineris said.
The biggest holder of outstanding commercial real estate mortgage debt at 36 percent of the total, banks saw their 90-day delinquency rate drop to 1.6 percent in the first quarter from 2.4 percent a year earlier, 3.4 percent in early 2012 and 4.2 percent in early 2011.
A 90-day delinquency rate of less than 1 percent would be more typical.
For a residential comparison, the MBA had earlier reported the 90-day delinquency rate for loans to homeowners was 2.4 percent in the first quarter.
The second biggest type of outstanding debt at 22 percent, commercial mortgage-backed securities and similar “conduit” financing saw their 30-day delinquency and repo rate drop to 6.2 percent in the first quarter from 8.5 percent a year earlier, 8.8 percent in early 2012 and 8.8 percent in early 2011.
CMBS, which are mortgages bundled together and sold to investors, have only been tracked by the Mortgage Bankers Association since 1997. The drop in delinquency rate from 6.8 percent in the fourth quarter to 6.2 percent in the first was the largest percentage point decline for CMBS on record.
The 90-day delinquency rate for bank-held mortgages and the 30-day delinquency rate for CMBS illustrate the different thresholds used to track past-due commercial real estate loans. As a result, delinquency rates are not comparable from one financing source to another.
For life insurance companies, the third largest holder of outstanding commercial real estate debt, the delinquency threshold is 60 days. The first-quarter rate was a tiny 0.05 percent for life insurance companies, indicative of their generally conservative underwriting practices and low loan-to-value ratios.
The pace of commercial real estate deals during the first quarter was down slightly from the first quarter of 2013.
“Commercial and multifamily borrowing typically starts the year slowly, with less than one-fifth of the annual volume usually done in the first quarter,” said Jamie Woodwell, the MBA’s vice president of commercial real estate research, in a prepared statement. “This year is looking to continue the trend.”
The report’s loan originations index registered 122 in the first quarter, the lowest it’s been in two years. Lending volumes nationwide are down for retail and apartment properties, while the biggest increases were for hotel and industrial properties.
Original Article By: Richard Metcalf- Journal staff writer