The Mortgage Bankers Associates (MBA) notes that, while some economists may have declared that the recession technically ended with the third quarter, its effects are still plaguing the real estate industry.   The Association's Quarterly Databook for the period ended September 30 shows that the commercial real estate market has yet to show many signs of recovery from the downturn.

The report states that vacancy rates rose during the third quarter for all major property types, with office and retail properties showing the greatest impact.  Retail vacancies rose from 12.9 percent to 18.6 percent during the quarter while office vacancies increased 3.4 points to a 19.5 percent rate.  Industrial properties increased from 9.8 percent to 13.0 percent while apartment vacancies rose from 6.5 percent to 8.4 percent.

Not surprisingly this lack of demand has been reflected in both rental rates and property sales.  Rental prices have asked for residential rentals have fallen by 6 percent, and fell 9 percent for both industrial and office properties and 8 percent for retail space.  Property sales continued to fall as well.  Year-to-date sales by the end of the third quarter were down 72 percent from the same period in 2008 and those sales had been off 66 percent from 200y.  This decline was reflected across all property types.

The sales volume is so low and so many sales are distressed in nature that trends in the prices these sales are bringing are difficult to assess; the MBA report calls the data "spotty at best."  It quotes Moody's/REAL index as showing a drop of 11.5 percent in value during the quarter and NCREIF TBI as reporting a 4.4 percent increase.  This means that "current transactions - and the gauges that track them - may not represent true 'values' of non-distressed properties."

New construction activity also continues to suffer. MBA noted that construction was started on only 5,000 multifamily housing units in October.  This is the lowest level of activity recorded since this data was first tracked in 1959.  

Mortgage origination activity during the quarter suffered from the lack of transaction volume as well as tight credit markets.  During the third quarter origination was 54 percent below levels one year earlier which were, in turn, 53 percent lower than in 2007. Fannie Mae and Freddie Mac continued to support the multi-family market and banks and life insurance companies each showed a small pick-up in volume.  There are also signs that CMBS issues picked up a bit in the fourth quarter which, MBA said, may signal a partial unfreezing of that market.

Few new loans are being made and existing ones continue to be paid down and off.  The Federal Reserve reports a 0.8 percent decline in outstanding commercial and multifamily mortgage debt during the quarter and the holdings of thrifts dropped by $20 billion. However, with the exception of construction loans, banks and thrifts increased their commercial and multifamily mortgages by $6 billion and this, with the increase in multifamily mortgages held by Fannie Mae and Freddie Mac and decreases in the balances of mortgages backing commercial MBS, resulted in the overall commercial/multifamily mortgage debt held during the quarter remaining essentially unchanged.

The performance of existing mortgages is being experienced differently by various investor groups. The general stress of the commercial and multifamily market is felt everywhere but loans held by life insurance companies, Fannie Mae, and Freddie Mac have generally performed better than those held by banks, thrifts, and in commercial MBS. These investor groups are going through an experience which MBA describes as roughly on par with what was seen following the stress of the late 1980s through the early 1990s. As a whole, commercial and multifamily mortgages are performing better than other types of loans, particularly construction loans and single-family mortgages.

The reports states that, while the phrase "real estate lags the economy" is a common one, it is never clear whether the speakers are referring to property prices, vacancies, rents, delinquencies, or some other aspect of the market or whether is applies more to the commercial or the single-family sector. "Regardless of the specifics," the report concludes, "the fact that the economy - at least as measured by GDP - began to grow during the third quarter may begin the countdown on the 'lag' and on when the economy will have grown sufficiently to rekindle demand for commercial real estate.  Given the depth of the recent downturn, the commercial property market has a significant amount of ground to re-cover