Dive Brief:

• Interest rate increases will hamper the multifamily lending environment for the rest of the year, according to an updated baseline forecast released by the Mortgage Bankers Association.
• Multifamily lending is expected to fall 10% from last year’s record high to $436 billion in 2022. However, MBA expects lending to rebound to $454 billion next year.
• A rebound in 2023 isn’t guaranteed, however. Instead, it will depend on the economy. “Should the economy enter a recession, which – if it were to happen – would most likely come in the first half of 2023, commercial and multifamily borrowing and lending would likely be further constrained,” said Jamie Woodwell, MBA's Vice President for Commercial Real Estate Research in a press release.

Dive Insight: 

Multifamily isn’t alone. Lending throughout commercial real estate will fall 18% in 2022 from $891 billion to $733 billion, according to the MBA. However, it is expected to increase to $872 billion in 2023.

There is no mystery behind the decrease in commercial and multifamily lending volume: Interest rate hikes across the U.S. debt and equity markets are curtailing the transaction market.

"After a record start to the year, we expect that the rise in rates, ongoing uncertainty about supply and demand balances among some property types and concerns about the direction of the economy will suppress new loan originations in the second half of the year,” Woodwell said.

As rates have risen, borrowers are getting squeezed. 

“The increase in interest rates changes the way the numbers are calculated,” said Otto Ozen, executive vice president of Costa Mesa, California-based brokerage firm The Mogharebi Group. “When the lender is giving you [less money], it impacts the amount of equity you have to bring to the table and the yields you are planning on.”

When borrowing costs increase, buyers can go back to sellers and ask for a price cut. And that’s often what they’ve been doing in the last couple of months. When buyers ask for a discount, sellers have a decision to make: They get out of the deal or they can agree to a lower price. 

But as rates continue to rise, owners may be facing the specter of even lower prices if they hold for a few more months. 

“Sellers are not in a situation where they’ll be able to get a similar price if they put the property back on the market,” said George Goyal, founding partner at Houston-based Three Pillars Capital Group, which specializes in Class B and C multifamily communities.

But there is some good news. “Most commercial real estate market fundamentals remain strong, with significant increases in the incomes and values of many properties in recent years,” Woodwell said. “These factors are why MBA expects loan demand to begin to bounce back in 2023 and 2024."

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