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- Commercial mortgage borrowing will rise 29% this year, the Mortgage Bankers Association estimates.
- That's still below levels since 2017, and last year looks to be the biggest slowdown in a decade.
- Fed rate cuts will determine if borrowing recovers, but higher-for-longer policy will suppress activity.
Commercial and multifamily mortgage borrowing and lending is forecast to surge 29% from last year's estimated total of $444 billion, the Mortgage Bankers Association estimates.
Though 2024's expected volume of $576 billion will mark a pick-up, the figure still stands below levels going back to 2017.
"2023 is likely to go into the record books as the slowest year for commercial real estate borrowing and lending in roughly a decade," MBA Head of Commercial Real Estate Research Jamie Woodwell said in the report.
The ongoing cooldown reflects uncertainty over the current direction of US monetary policy, the analyst said, with markets at odds over when the Federal Reserve may start cutting interest rates.
Tighter monetary policy since 2022 has pushed up borrowing costs across the commercial real estate market, and resulted in stricter lending standards among mortgage originators. This has weighed on outlooks among industry players, who now worry that higher borrowing costs will make loans much more difficult to refinance, which could lead to a wave of forced selling.
With $2.2 trillion in debt set to mature by 2027, Capital Economics anticipates a wave of defaults to rock the market, with peak-to-trough declines of 20%.
"We expect evidence of distress to ramp up this year as loan extensions end. Many borrowers will be forced to either inject new capital, return assets to lenders, or sell into a soft market." the firm's Kiran Raichura wrote on Monday.
In MBA's report, Woodwell noted that commercial mortgage originations historically move in tandem with property prices, which could be boosted if interest rates and cap rates were to decline. Since the Fed's first rate hike, US commercial property prices dropped by over 11%, the IMF said in a report this week.
But others have estimated steeper declines to come. Raichura expects prices to drop off another 10% this year, while a December outlook from NBER outlined that total commercial real estate losses could amount to $160 billion.
If monetary policy remains higher-for-longer, mortgage activity will be further suppressed, Woodwell said.