Lifetime CRE mortgage returns Investors have an uncertain future

Those who bet that commercial real estate can only go up and never go down might take a close look at the Trepp LifeComps portfolio report for the first quarter and its negative 5.77% year-to-date return.

“Asset classes in the LifeComps portfolio were hit by negative total return in the first quarter of 2022,” the report said. “Multifamily properties were the hardest hit, with a total return of -5.33% realized in the first quarter. Commercial real estate and hotel loans saw a lower realized loss of -3.08% and -3.22% “Continued volatility in global markets could impact investor-focused returns as parts of the global economy remain shuttered and heighten uncertainty as we move forward into 2022.”

Investments in industrial property have slowed — for example, Amazon reportedly dumped around 10 million square feet of storage space. According to Trepp, additional financing and new loans to industrialists have halved to $1.8 billion since the fourth quarter of 2021.

The LifeComps Commercial Mortgage Index is a benchmark based on cash flow and mortgage loan performance data.

Highlighting the Fed’s interest rate hikes, the report notes that “a rate hike can impact real estate by making loans more expensive and pushing cap rates higher, signaling a possible slowdown in CRE investments”.

Given what might be called the new post-pandemic normal, at least for now, occupancy rates for certain categories are likely a source of concern for investors. The lowest in the portfolio was for hotels with only 46%. The second worst was the office at 89% occupancy. Nearly two-thirds of the loans in the portfolio relate to office buildings.

Even with negative returns, multifamily, as well as industrials, remain “solid investment choices among life insurance investors.”

The results parallel a hardening of sentiment in the industry. The CRE Finance Council (CREFC) noted that general feeling among its board of governors took a nosedive for the first quarter of 2022. The current level, a score of 80.5, down from 105.2 in the last quarter of 2021, is the second lowest on record, with only the first quarter of 2020 registering worse . The change was “resolutely negative”.

Additionally, commercial real estate development association NAIOP saw a downward trend in the first quarter. Its NAIOP CRE sentiment index is currently at 53. This is down from 56 in the fourth quarter of 2021. Before the pandemic, the value was 57.


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