A challenging year ahead; many commercial and multifamily lenders are hoping 2004 produces volume not too much less than 2003. But realistically, with rates rising, most concede it will be no walk in the park.

Author:Bergsman, Steve
Position:Cover Story

THE BUSINESS OF ECONOMIC FORECASTING is somewhat akin to reading tea leaves and often about as accurate. No matter how immersed in a particular industry one is, it is still difficult to gauge even the near future when markets change so quickly.

Peter Donovan, chief executive officer of Boston-based Berkshire Mortgage Finance, for the past two years has predicted year-on-year slowdowns for commercial/multifamily finance, but volume continues to be solid--nationally and at Berkshire Mortgage.

As an example, last year commercial mortgage-backed security (MBS) volume hit $90 billion, about $65 billion coming from the United States. Although total commercial mortgage-backed security (CMBS) issuance is expected to decline in 2004, U.S. totals will hold steady, according to Lend Lease Real Estate Investments Inc., Atlanta.

Berkshire Mortgage saw its business activity remain level last year. In 2002 and 2003, the company's origination volume held stable at close to $3.5 billion. Undaunted, Donovan again predicts "next year's" volume will be down. "One of these years I suppose I will get it right," he says.

On the other hand, Clifford Hardy, CMB, president and chief executive officer of Tampa, Florida-based First Housing, was right last year--and probably wishes he'll be wrong for 2004. When asked last year at this time what he thought 2003 would look like, Hardy quickly and without hesitation responded, "2003 will be a better year than 2002."

Hardy, chair of the Mortgage Bankers Association's (MBA's) Commercial Real Estate/Multifamily Finance Board of Governors, better known as COMBOG, is not so sanguine about 2004. "Looking down next year's pipeline, I am a little concerned about continuation of that pipeline," he says.

The problem for First Housing is that, unlike most lenders, most of its business is new construction and not refinance. Florida, which is First Housing's primary market, remains overbuilt in a number of key sectors. "We are even seeing overbuilding in affordable housing, which I never thought I would see," says Hardy. "We are seeing some developers return their allocation back to the issuing agency rather than build."

Lenders that have some dependency on new construction should be wary. The numbers for 2003 haven't been totaled yet, but a report entitled Construction Outlook: Midyear Update 2003, by McGraw-Hill Construction Dodge, part of New York-based The McGraw-Hill Companies Inc., forecasts a slight decline in the value of all new construction for 2003 as compared with 2002, which was up just 1 percent over the prior year. In individual sectors for 2003, McGraw-Hill Construction Dodge estimates office construction numbers will be at -8 percent, warehouse -13 percent, hotel +13 percent, retail +2 percent and multifamily +2 percent.

In 2004, McGraw-Hill Construction Dodge expects all construction (including residential, nonresidential and nonbuilding--highways, bridges, etc.) to rise 1 percent, with institutional building (including schools, health-care facilities and public buildings) declining but the income-property market making a rebound.

For 2004, a lot depends on the economy and employment trends and, unfortunately, there is not a great deal of consensus in this regard.

"The health of the real estate finance market is directly dependent on jobs creation, and we anticipate significant jobs growth in 2004 and into 2005," says Douglas Duncan, MBA's senior vice president and chief economist.

That compares with the Expectations & Market Realities in Real Estate: 2004 booklet published jointly by Principal Real Estate Investors, Real Estate Research Corporation (RERC), Chicago, and Torto Wheaton Research (TWR), Boston. The study states, "We expect the U.S. economy, in terms of GDP [gross domestic product] and income growth, to continue to strengthen throughout the remainder of 2003-2004, while the job market will likely continue to experience a delayed and only gradually improving recovery."

A number of contradicting cross-currents continue to impact the real estate industry, both to the benefit and detriment of those firms involved in the sector, observes Kenneth Riggs, RERC's chief executive and managing principal. "People suspected the economy was growing in 2002, but jobs were not there. The math fundamentals were poor for real estate in certain sectors such as office and warehouse, while retail properties did well. Single-family housing was robust, and that hurt multifamily."

Riggs is hesitant to invoke the word "disconnect," but to some extent it still best...

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