By the end of 2023, commercial and multifamily mortgage borrowing and lending were expected to fall by nearly 50 percent nationally. In Central Kentucky, however, that doesn’t seem to be the case, local mortgage brokers said.
According to the Mortgage Bankers Association, mortgage borrowing and lending are expected to reach only $442 billion nationally in 2023, a 46 percent drop from 2022’s total borrowing and lending of $816 billion.
“The logjam in the commercial real estate markets that began last summer has remained firmly in place,” Jamie Woodwell, MBA’s Head of Commercial Real Estate Research, said in a statement. “Questions about supply and demand dynamics for some properties, the rise and volatility in interest rates, and the low number of transactions and coinciding lack of price discovery have all contributed to a marked decline in demand for new mortgages. Unfortunately, those and other factors will likely continue to exert downward pressure on borrowing and lending volumes in the coming quarters.”
Jason Heflin, branch manager of Ruo Mortgage in Lexington, said local investors are adapting to a rapidly changing market, but commercial and multifamily mortgages locally haven’t seen a similar decline.
With prices and interest rates climbing, the costs of commercial investing have been climbing, he said. And while commercial real estate is down because of the increase in empty office buildings, investors are still buying multifamily units, he said.
“Commercial real estate, as in business buildings and office space, is slowing because of the amount of empty space available right now,” he said. “That can be attributed to COVID and how many people are working remotely… a lot of banks are starting to pull back and be a little more conservative when it comes to commercial mortgages right now.”
For multifamily buildings, he said, there doesn’t seem to be any slowdown in the area.
“To my knowledge, the number of rental units has been increasing in Central Kentucky,” he said, noting a number of multifamily apartment complexes going in around the city. “There are not enough homes for the people who want to live in Fayette County right now. This area is always a desired place to come to and live.”
The past three years, he said, has seen an influx in investors coming in from outside the state looking to buy affordable homes in an area with a lower cost of living.
According to MBA, multifamily lending is expected to drop 41 percent to $285 billion this year, down from $480 billion. MBA expects commercial real estate to increase to $559 billion, a nearly 19 percent increase. Of that, officials said, multifamily lending will reach about $339 billion.
“Commercial mortgage originations have historically followed property prices, and the uncertainty about the future path of interest rates has been a contributing factor to the current slowdown,” Woodwell said. “If interest rates and cap rates were to fall, that should help boost values and promote borrowing. If they remain higher for longer, as is increasingly likely, that will suppress activity. This uncertainty is a contributing factor in today’s slowdown.”
Heflin said that he didn’t see that happening in Central Kentucky.
“I would be shocked if we had those kinds of numbers,” he said. “Unless we had an economic crash, I doubt we’ll ever see a 46 percent decrease.”
On the residential side in our area, mortgages have slowed as the number of homes for sale has dropped. According to Federal Reserve Economic Data, as of September 2023, there were 4,260 homes listed for sale, compared to 5,936 homes for sale in June 2022.
MBA is predicting that interest rates on mortgages will continue to fall, hitting 6 percent by the end of 2024 and reach the mid-5 percent range going into 2025.
Lesley Fluke, regional president in Central Kentucky for Field & Main, said lending is down on the residential side in Central Kentucky.
“Residential mortgage lending is slow and significantly impacted by the lack of inventory in Central Kentucky,” Fluke said. “There is demand in most markets but no inventory. The third quarter was Field & Main Bank’s busiest quarter in mortgage production this year. The mortgage pipeline and pre-approvals continue to be strong, but buyers are beginning to wait in hopes that interest rates will decline which may cause an uptick in listings.”
For those interested in multifamily properties, Fluke said, the higher cost of borrowing isn’t stopping all multifamily mortgages.
“The higher interest rate environment is stressing net operating income due to the higher cost of borrowing, and rental rates have hit ceilings in some markets,” she said. “However, Field & Main Bank is actively financing multifamily acquisitions and refinances throughout Kentucky, Southern Indiana, and Cincinnati.”
Heflin said recent changes in Fanny Mae and Freddie Mac down payment requirements on multifamily units may spur investment into duplexes, triplexes, and quadplexes. Previously, those multifamily homes required between 15 and 20 percent down. Now, he said, if the buyer lives in one of the units, the down payment can be as low as 5 percent.
While that may not be appealing to some buyers, he said, it may appeal to others.
“For millennials, they may use that as a starter home and set aside the income from the other units,” he said.
Nationally, Fanny Mae and Freddie Mac’s apartment lending volume has been falling. In the third quarter, multifamily lending fell 27 percent over the same time in 2022, the MBA said, with apartment lending falling 50 percent. As a result of market conditions, the Federal Housing Finance Agency (FHFA) announced in November that it would be limiting financing caps for the government-sponsored entities to $70 billion each for Fanny Mae and Freddie Mac, for a total of $140 billion.
The agency said it will continue to monitor the multifamily mortgage market and increase the caps when needed but will not reduce the announced limits if the 2024 market is smaller than expected. The caps will not apply to loans supporting workforce housing.
“The 2024 multifamily loan caps… will promote the enterprises’ continued strong commitment to addressing the need for affordable rental housing,” FHFA Director Sandra L. Thompson said in a release announcing the loan limits. “The workforce housing exemption should encourage conventional borrowers to commit to preserving rents at affordable levels for extended periods of time.”
Fluke said she expects mortgage demand to continue to grow, however.
“Field & Main Bank continues to experience strong loan demand in each of its markets,” she said. “We anticipate loan growth to continue in 2024 but at a slower pace.”