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Commercial Real Estate Debt Continues to Increase

The level of commercial/multifamily mortgage debt outstanding continued to grow in the first quarter, according to the Mortgage Bankers Association's analysis of Federal Reserve Board flow of funds data.

At the end of the first quarter 2005, $2.35 trillion in commercial/multifamily mortgage debt outstanding was recorded by the Federal Reserve, an increase of $55 billion, or 2.4% from the end of 2004, the MBA said. Multifamily mortgage debt outstanding stood at $607 billion at the end of the first quarter - an increase of $7.5 billion, or 1.3% from the end of 2004, according to the MBA.

"Like most credit markets, the commercial and multifamily mortgage market has continued to see strong growth," said Doug Duncan, MBA's chief economist and senior vice president. "The strong capital flows and the resulting low interest rate environment are signs of the general availability of capital as well as investors' attraction to these particular markets."

Commercial banks continue to hold the largest share of commercial/multifamily mortgages, with $1.01 trillion, or 43% of the total, according to the MBA. Many of the commercial mortgage loans reported by commercial banks, however, are actually "commercial and industrial" loans to which a piece of commercial property has been pledged as collateral and it is the borrower's business income - not the income derived from the property's rents and leases - that drives the underwriting, pricing and performance of the loan, the MBA noted. Since the other loans are income property loans, meaning that the income primarily comes from rents, the commercial bank numbers are not comparable, according to the MBA.

Commercial mortgage-backed securities pools are the second-largest holders of commercial/multifamily mortgages, holding $444 billion, or 19% of the total, the MBA said. Life insurance companies hold $254 billion, or 11% of the total, and savings institutions hold $184 billion, or 8% of the total, according to the MBA.

Government sponsored-enterprises and federally related mortgage pools, including Fannie Mae, Freddie Mac and Ginnie Mae, hold $125 billion in multifamily loans that support the mortgage-backed securities they issue (referred to here as federally related mortgage pools) and an additional $56 billion in "whole" loans in their own portfolios, for a total share of 8%, the MBA said.

Looking just at multifamily mortgages, the GSEs and Ginnie Mae hold the biggest share, with $125 billion in federally related mortgage pools and $56 billion in their own portfolios - 30% of the total multifamily debt outstanding, according to the MBA. They are followed by commercial banks with $123 billion, or 20% of the total, savings institutions with $90 billion, or 15% of the total, and CMBS issuers with $77 billion, or 13% of the total, the MBA said.

In the first quarter, commercial banks saw the largest increase in dollar terms in their holdings of commercial/multifamily mortgage debt - an increase of $28 billion, or 3%, which represents 51% of the total $55 billion increase, according to the MBA. CMBS issuers increased their holdings of commercial/multifamily mortgages by $21 billion, or 5% - representing 38% of the net increase in commercial/multifamily mortgage debt outstanding, the MBA said.

In percentage terms, state and local government retirement funds saw the biggest increase in their holdings of commercial/multifamily mortgages - a jump of 14% - while non-farm, non-corporate businesses saw the biggest drop (a net change of -7%), according to the MBA.

The $7.6 billion increase in multifamily mortgage debt outstanding between the fourth quarter of 2004 and the first quarter of 2005 represents a 1.3% increase, the MBA said. In dollar terms, commercial banks saw the largest increase in their holdings of multifamily mortgage debt - an increase of $3.5 billion, or 3%, which represents 46% of the total increase, according to the MBA.

Savings institutions saw an increase of $2.9 billion, or 3.3%, in their holdings, the MBA said. CMBS issuers increased their holdings of multifamily mortgage debt by $2.2 billion, or 3%, according to the MBA.

SNAPSHOT: COMM/MF Debt Outstanding

1st Qtr '05 $2.35 Billion

4th Qtr '04 $2.29 Billion

% Change 4%

Source: MBA

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