Why MBA originations forecasts are a tall order

The MBA’s $500bn forecast for US loan originations this year is plausible, but the odds are stacked against its predictions for record years in 2017 and 2018

The Mortgage Bankers Association (MBA) has forecast $500 billion in US commercial real estate loan originations for 2016, just shy of last year’s $504 billion and not far off the $507 billion record from 2007.

The number is getting mixed reviews. “Transaction volumes and CMBS volumes are off from last year, so it feels aggressive,” an executive with a leading non-bank lender told me,” while one of his competitors said “I don’t think anything is out of whack or too aggressive about it.”

But the MBA went further to forecast $519 billion and $539 billion in 2017 and 2018, respectively, numbers which seem improbable given significant declines in sales volume, increasing volatility, peaking prices, weak economic growth, and the late stage of the CRE cycle.

Investment sales are one factor that is closely correlated with originations, and sales declines have been steep. In Q1, sales fell 20 percent from a year earlier, according to Real Capital Analytics (RCA). The firm said the drop was “not indicative of a broader downturn in property performance” at the time.

But the trend has continued. When volume declined 34 percent in April and then 36 percent in May, RCA attributed that to the “unusual pace of portfolio and entity-level deals seen in early 2015.” But, halfway through the year, we may be running out of excuses.

Originations volume did hold steady at least through Q1, when the MBA said originations “were essentially flat” compared with last year. Jamie Woodwell, MBA’s VP of Commercial Real Estate Research, noted after Q1 that new regulations and “broader market conditions could have an impact on originations during the remainder of the year.”

A Q2 report wasn’t available at press time, but Woodwell told me this week that the $500 billion forecast is based on strong supply/demand and property fundamentals, despite volatility and some slippage on pricing earlier this year.

“If you look at interest rates and cap rates, that’s still a positive story for prices and transactions,” he said. On the supply side, despite CMBS’s struggles, life companies, Fannie Mae, Freddie Mac and banks are expected to pick up some of the slack.

But with the backdrop of a slow if not weak economy, the prospect of sustained originations growth through 2018 seems unlikely.

Among other top financial firms, Citigroup has been warning all year that the risk of recession is rising. UBS has now stated that there is a 60 percent chance of entering a recession in the next 12 months – the highest probability since the Great Recession.

Meanwhile, uncertainty, including Brexit, has caused the Federal Reserve to put off any interest rate hikes until next year. USA Today neatly summarized a range of other domestic concerns.  

There are various signs the CRE cycle is approaching its final throes. In a recent article, developer Mike Russell of The Russell Company noted that the real estate markets are driven by real job and income growth, both of which have trended downward in recent years.

A jobs correction is looming in real estate, he added, pointing to Blackrock’s plans to cut about 400 jobs in the coming weeks. And rents and property prices have peaked in many markets.

“If rents and prices for product are flattening, or in some cases declining, then the amount of debt that can be achieved on any given project is going to be reduced,” Russell told me, adding that the coming election adds to the stress on the market.

“If you go back historically, every first year of a presidency is usually a down year, and whoever of the two candidates we get this time will likely bring even more negativity and less certainty.” 

The optimistic non-bank lender told me that originations could spike as Brexit’s impacts loom and borrowers seek to lock in low rates. Russell even admitted that $500 billion in originations could potentially be reached as lenders continue to be incentivized to lend.

But given global uncertainty, peaking prices, weak economic growth, an upcoming election, and the increasing likelihood of a recession, originations numbers are likely to taper off well before we see the optimistic numbers the MBA and other CRE finance professionals are hoping for.