Mortgage Financing in 2018

Sweeping tax reform and a changing economic landscape stand to impact mortgage lending in 2018 and beyond. Mortgage interest rates haven’t been this high since December 2016, while anticipated rate hikes from the Federal Reserve put upward pressure on interest rates. Freddie Mac reports that as of February 8, 30-year fixed mortgage rates were up 33 basis points since the start of 2018. And, The Mortgage Bankers Association (MBA) predicts the Federal Reserve will raise the federal funds rate four times in 2018 and twice more in 2019. Simply reaching 5-percent would mark the highest rates since 2011.

Underwriting Trends

Tighter lending standards also stand to impact the investment real estate market in 2018. Findings from the Federal Reserve’s senior loan officer opinion survey, released in early February, note roughly 20-percent of banks anticipate tightening multifamily loan standards in 2018. In addition, the MBA predicts a slight decline (3-percent) in multifamily mortgage originations in 2018, following a 17-percent year-over-year increase in 2017. That said, total multifamily lending is still slated to reach $271 billion this year.

Despite already having some stricter lending requirements in place, the MBA reported a 16-percent year-over-year increase in multifamily loan dollar volume at the end of 2017.

Beyond impacting loans on existing multifamily assets, new construction loans will also face further tightening in 2018, due in part to the influx of new multifamily development in recent years, particularly in the Class-A space.

Retail Lending

The continued growth of online shopping/ecommerce and shifting expectations for the consumer experience are impacting the lending environment for retail properties. Last year alone, loan originations for retail properties declined by 21-percent, according to the MBA. Further, the dollar volume for retail loans declined by 40-percent. And, according to an analysis of US Census data by A.T. Kearney, e-commerce will account for one-third of retail sales in the U.S. by 2030 posing further challenges for brick-and-mortar retail.

With high vacancy rates, even the most iconic shopping districts such as Fifth Avenue in Manhattan are faced with falling asking rents. In just the past two years, asking rents fell 30-percent, according to Cushman & Wakefield.

Investment Opportunities

While rising interest rates and stricter loan standards pose challenges for multifamily investors, the recent tax reform package is anticipated to positively impact investors. With prospective buyers projected to shy away from homeownership in response to lower deductions for mortgage interest as well as for state and local taxes, multifamily investors have an opportunity to maintain strong occupancy rates, and potentially raise asking rents, on existing multifamily assets. Another sign of good news for the multifamily market, the U.S. Census Bureau’s vacancy rate for rental apartments fell 110 basis points during Q4-2017.

As the impact of these changes play out during the next 12-months and beyond, investors can benefit from engaging a qualified investment sales advisor to help quarterback their transaction and provide counsel regarding real estate investing strategy.  With offices in New York, Connecticut and Massachusetts, Northeast Private Client Group actively supports private investors looking to buy, sell or exchange mid-market properties including mixed-use, multifamily, retail and office assets.