Recent data from the Mortgage Bankers Association’s (MBA) latest Commercial/Multifamily Mortgage Debt Outstanding report shows that the level of outstanding debt on commercial/multifamily mortgages – during the final three months of 2021 – was $287 billion (7.4 percent) higher than the level seen at the end of 2020.
The MBA releases this data on a quarterly basis and this provides a snapshot of debt and market health at the time. Released at the end of March 2022, this report focuses on the last quarter of 2021 – and compares figures to the preceding quarter and the corresponding quarter of the previous year.
For the purposes of this research, the four major investor groups considered include: “bank and thrift; commercial mortgage-backed securities (CMBS), collateralized debt obligation (CDO) and other asset-backed securities (ABS) issues; federal agency and government-sponsored enterprise (GSE) portfolios and mortgage-backed securities (MBS); and life insurance companies”.
Their data shows that “total mortgage debt outstanding rose by 2.9 percent ($116.0 billion) in fourth-quarter 2021” and specifically that “multifamily mortgage debt grew by $42.1 billion (2.4 percent) to $1.81 trillion during the fourth quarter, and by $121.9 billion (7.2 percent) for the entire year”.
Understanding the data
MBA’s Vice President of Commercial Real Estate Research Jamie Woodwell commented: “Strong borrowing and lending backed by commercial and multifamily properties drove the level of mortgage debt outstanding to a new high at the end of 2021.”
This was evident in every major capital source, he said, adding: “The 7.4 percent annual increase in outstanding debt compares to a 19.5 percent increase in underlying property values.”
As Yield Pro points out in their analysis, government-sponsored enterprises (GSE) “continued to have the largest share of multifamily mortgages outstanding”.
In related material, MBA confirmed that commercial and multifamily mortgage delinquencies in the US also declined in Q4 2021, characterizing the rates as “down or flat for every major investor group”.
So far in this blog series, we’ve looked at some of the most cutting-edge emerging technologies: The Internet of Things (IoT), robotics, and virtual reality. We’ve discussed the potential these developments have to revolutionize the way we do business and work in the real estate space.
While each of those has its applications, none hold quite the same promise for changing the fundamental aspects of how we make, and document, commercial real estate (CRE) deals as blockchain. In this fourth entry in the emerging tech series, we have a look at the implications of this pivotal technology.
Nowadays, blockchain is a term everyone’s hearing with increasing regularity. To start, it’s worth having a brief recap of exactly what the tech is. At its simplest, a blockchain is a ledger – a record of information. Not all that different from the databases you’re already using to record details of properties, clients, or transactions.
The feature that makes blockchain unique is the way that information is recorded. Each “block” can hold a certain amount of data. Once a block is full, a new block is started and the previous block forms part of an immutable chain – essentially a timeline extending outwards from the first block to the current one.
Information on the blockchain is public and distributed across a network of computer systems – meaning that it’s very, very difficult for one person to hack or alter the information stored in the chain.
The opportunity blockchain presents for the CRE space, is the ability to streamline a lot of time-consuming tasks. Imagine having all of the paperwork for a given property digitized, accessible to everyone involved in the deal, and confirmed as accurate by multiple parties.
“There are two areas where I think the blockchain is. There’s going to be the intersection with legal tech, so that’s land registry and recording and ownership, and all of that paperwork that exists in the system… the other is the intersection with fintech.”
Of course, an issue that comes up here is how this system can be used with potentially sensitive information – client details that shouldn’t be a matter of public record. For business networks, private blockchains can be set up to only allow access to specified parties. In this case, the identity of participants is verified in the network as well, unlike public blockchain where users can remain anonymous. Private blockchains function more like a traditional database in this sense, trading off some of the immutability of their data for privileged access.
Sealing the smart deal
Maybe the most promising application of blockchain for CRE deals is being able to deploy “Smart Contracts” for things like tenancy agreements. Smart contracts hard code the details of an agreement on the blockchain, and are uniquely suited to real estate deals, because they can handle conditional clauses.
As an example, startups like UK-based Midasium are already providing a prototype platform that replaces traditional landlord-tenant agreements. Using smart tenancy contracts, clauses of the agreement are automatically enforced when certain conditions are met. This can include paying rent, returning a security deposit, and directly deducting maintenance costs from the rental amount paid across to the landlord.
It’s a system designed for transparency and rapid settlement, and the concept is gaining traction in other parts of the world. An added bonus of using smart contracts for tenancy is the possibility of building up a database of real-time data for rental prices and trends in the rental market.
A growing sector
Overall, enterprise reliance on blockchain is set for rapid acceleration. Forbes, quoting an International Data Corporation (IDC) report notes that:
“Investment in blockchain technology by businesses is forecast to reach almost $16 billion by 2023. By comparison, spending was said to be around $2.7 billion in 2019, and we will see this acceleration ramping up over the coming year.”
Blockchain adoption in CRE, however, is still in the early stages. The tech still needs to overcome a few growing pains – in terms of privacy concerns, operational complexity, and a lack of standardized processes – before we’ll necessarily see it forming the backbone of CRE transactions.
That said, it’s a space well worth keeping an eye on. There’s been growing interest, for example, in CRE tokenization – splitting the value of a given asset into separately buyable blockchain-based tokens. What this means in practice is that instead of looking for one buyer for an expensive asset the value gets subdivided and opened to a much broader market. Which in turn may actually boost the value of the underlying asset.
There’s a lot of potential and little doubt that blockchain will make its way into CRE one way or another. But, like many things in the cryptocurrency and blockchain space, the real challenge will be separating the wheat from the chaff, the fact from the hype, and identifying functional applications of the tech rather than purely fanciful ones.
Your new build might pack the best-of-breed technologies and energy solutions – but did you know that it would take roughly 65 years for an energy-efficient new development (with as much as 40% recycled input materials) to save or recover the equivalent energy lost through demolishing? This is according to the United States Environmental Protection Agency.
Viewed through that lens, our approach to green buildings and energy efficiency may need a serious rethink. There is another approach to take, of course, and that is adaptive reuse. A strategy that although not strictly new, is quickly becoming a conversation starter and “darling” of sustainable commercial real estate (CRE) circles.
Adaptive reuse is not just about redesigning or redeveloping, it can be viewed as breathing new life into buildings, updating their use case as much as their construction, and a smart green step to take. They can also be beautiful, and simply “cool” – as this article in Architectural Digest details in its review on Cool Is Everywhere: New and Adaptive Design Across America, by photographer Michel Arnaud.
With adaptive reuse, developers and architects are starting on a green foot – using an existing building shell, rather than having to construct right from scratch. That means less material use, often less waste, and can reduce the number of shipments of materials needed, which contributes significantly to a building’s carbon footprint.
Adaptive reuse can also contribute to a neighborhood – in feel and in service provision – and is a popular way of making space for more offices and workplaces in an area with a declining manufacturing industry, or unlocking dining and entertainment offerings as the demographics in a neighborhood change. Urban Stack, for example, is the oldest standing building in Chattanooga. It was previously the Southern Railway Baggage Depot.
The old drill hall in Guelph, Ontario, Canada, is another such example. The local press describes it as “a building without a purpose – at least not a contemporary one”, in this report on the City’s plans to repurpose the building which has stood empty for over a decade.
And on campuses, like that of Boston University, adaptive reuse enables a strategy of densification and reuse, rather than trying to expand in this already bustling and developed city.
News broke in late July that Apple was pushing back its ‘return to the office’ expectations by at least a month. CEO Tim Cook had previously flagged September as a likely date for the majority of its office-based staff to resume in-person, on-site work – based largely on the availability of the vaccinations.
Now Bloomberg – citing unnamed sources – says the technology giant is feeling less confident in this push to return as many in the US remain unvaccinated and new variants continue to plague health services.
This is a blow to the “return to the office” rhetoric which has dominated the news in recent months and may have knock-on effects for the commercial real estate (CRE) industry – in terms of development planning, new builds, and investor sentiment.
Mask up orders
This decision is informed by government mandates, according to the sources. Drawing from the New York Times stats, Bisnow writes: “The average number of new daily coronavirus cases in California, where Apple is headquartered, has tripled in the past two weeks”. In addition, they report, Cupertino – Apple’s ‘home city’ – and the Santa Clara County in which it sits has issued a statement calling for the return to mandatory mask-wearing.
The county’s collective statement reads: “[we] recommend that everyone, regardless of vaccination status, wear masks indoors in public places as an extra precautionary measure for those who are fully vaccinated, and to ensure easy verification that all unvaccinated people are masked in those settings.”
This, as well as news on the effect of the Delta variant of Covid-19, has seemingly subdued sentiment on the markets, with the S&P500 taking a knock – dropping the most it has in two months, according to an additional Bloomberg report.
Despite this, many real estate investment trusts (REITs) and related investment vehicles are rallying. A contributor on the Nasdaq website takes a look at this counter-intuitive trend, pointing out that: “Vanguard Real Estate Index Fund ETF Shares (VNQ) added about 24.1% this year compared with 16.1% gains in the SPDR S&P 500 ETF (SPY)”. They argue that inflation, housing price increases, “booming cloud business” are among the factors underpinning this resilience.
Finally, the relatively high yields of real estate are setting them apart from other investments, writing: “The benchmark U.S. 10-year Treasury yield was 1.38% on Jul 1. Against such a low-yield backdrop, dividends offered by real estate ETFs are quite sturdy.”
Australia is certainly feeling the effects of the global climate crisis in recent years. The sensitive and beautiful ecosystem enjoyed by the “Aussies” has been ravaged by heat waves and wildfires and drowned in record-breaking floods – not to mention the tragedy that is the widespread bleaching of corals on the Great Barrier Reef, the result of rising ocean temperatures.
Perhaps this is why Australians are getting serious about cracking down on common pollutants and regulating the ecological impact of the industry. The latest news in this regard is the tough energy standards introduced by the City of Sydney (the government of Australia’s most populous city), and support for these coming from the leading property companies in the region.
Zero net emissions
Commercial Real Estate Australia published an article in late May 2021 detailing how the commercial real estate (CRE) and property leaders in the city have come out in support of the tough new energy standards that will apply to all development applications – from as early as the start of 2023. Specifically, the City[MOU1] is targeting zero net emissions for the entire local government area by 2035.
The report reads: “For the first time, City of Sydney is proposing that DAs to build or redevelop hotels and shopping centers must achieve a minimum National Australian Built Environment Rating System (NABERS) environmental rating, in this case, four stars. It also wants to increase the existing NABERS rating for office buildings from five stars to 5.5 stars by the start of 2023.”
Sydney Mayor Clover Moore says this makes economic sense, as well as environmental, and will help “save more than $ 1.3 billion on energy bills for investors, businesses and occupants between 2023 and 2040”.
Lead by the people
What’s particularly interesting about this, and other eco-friendly news emanating from Down Under, is that these gains appear to be driven at a regional and personal level, more than from the incumbent government which has been described as “one of the most climate-skeptical political groups in the developed world”.
For example, green energy is a big talking point in residential and commercial real estate (CRE) spheres, with considerable demand from consumers. One in four Australian homes now have rooftop solar energy supplies, says Recharge News. Clean energy is now almost a third of the power mix in the country.
The real estate industry is considered a thought leader in this space in Australia and has been recognized by bodies like the Global Real Estate Sustainability Benchmark (GRESB), in which they have topped the charts for a decade.
Australia’s Green Building Council calls GRESB “the global benchmark for environmental, social and governance (ESG) performance of real assets, defining and measuring standards for sustainability performance”, explaining that this assessment metric includes not just property, but also real estate investment trusts (REITs), funds, and developers – representing assets in excess of AUD $6 trillion.
Australian companies are also prominent in the Dow Jones Sustainability Index – another indicator, perhaps, of how the [professional and personal] tail can wag [government] dog in pursuing greener CRE.