Commercial Mortgage Debt Hits New Heights

Commercial real estate debt outstanding in the United States grew by 2.5% in the first quarter to exceed $3 trillion for the first time, according to the Mortgage Bankers Association’s analysis of the Federal Reserve’s Flow of Funds data.

Commercial debt, which includes multifamily mortgages, increased to $3.001 trillion in the first quarter, a $72.4 billion increase from the fourth quarter of 2006. Multifamily mortgage debt outstanding grew to $741 billion, an increase of $11.8 billion or 1.6% from the second quarter.

“Issuers of commercial mortgage-backed securities (CMBS), collateralized debt obligations (CDO) and other asset-backed securities (ABS) were responsible for almost 60% of the increase in commercial/multifamily mortgage debt outstanding,” says Jamie Woodwell, the MBA’s senior director of commercial/multifamily research. “Looking just at the multifamily market, CMBS, CDO and other ABS issuers were responsible for a full 70% of the growth.”

The Federal Reserve Flow of Funds data summarizes the holding of loans or, if the loans are securitized, the form of the security.

Commercial banks continue to hold the largest share of commercial/multifamily mortgages, with more than $1.3 trillion or 43% of the total. Many of the commercial mortgage loans reported by commercial banks, however, are actually “commercial and industrial” loans to which a piece of commercial property has been pledged as collateral. It is the borrower’s business income - not the income derived from the property’s rents and leases - that drives the underwriting, pricing and performance of these loans. A recent MBA report found that among the top 10 commercial real estate bank lenders, 48% of their aggregate balance of commercial, non-multifamily real estate loans were related to owner-occupied properties.

CMBS, CDO and other ABS issuers are the second largest holders of commercial/multifamily mortgages, holding $661 billion or 22% of the total. Life insurance companies hold $282 billion or 9% of the total, and savings institutions hold $205 billion or 7%. Government Sponsored-Enterprises (GSEs) and federally related mortgage pools, including Fannie Mae, Freddie Mac and Ginnie Mae, hold $143 billion in multifamily loans that support the mortgage-backed securities they issue and an additional $81 billion in whole loans in their own portfolios, for a total share of 7% of outstanding commercial/multifamily mortgages.

In the first quarter of 2007, CMBS, CDO and other ABS issuers saw the largest increase in dollar terms in their holdings of commercial/multifamily mortgage debt - an increase of $42 billion or 6.9%, which represents 59% of the total $72.4 billion increase. Commercial banks increased their holdings of commercial/multifamily mortgages by $22 billion or 2%, representing 30% of the net increase in commercial/multifamily mortgage debt outstanding.

In percentage terms, real estate investment trusts (REITs) saw the biggest increase in their holdings of commercial/multifamily mortgages - a jump of 12% - while finance companies saw the biggest drop (a net reduction of 4.0%).


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