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The Unanswered Multifamily Contradiction

High CMBS Delinquency Rate Defies Hot Investment Market

With increasing occupancies and rents, the multifamily sector has been one of the commercial property types to bounce back fastest from the effects of the ‘Great Recession.’ Yet, at the same time, the multifamily sector has been one of the worst performing property types in terms of delinquencies, a contradiction noted by Fitch Ratings.

Using the standard Fitch Ratings definition that counts any loan 60 or more days behind in payment as delinquent, the multifamily delinquency rate across the whole country was 14.4% at the end of 2011 but dropped to 12.8% at the end of January 2012.

Given the strong run-up in rents and investment, multifamily housing in CMBS transactions should be performing inversely to residential housing in the same geographic area. Multifamily performance should be strong where residential performance is weak and vice versa. As people lose their homes to foreclosure etc., one of their options is to move into rental housing, traditionally provided by multifamily apartment units. But as theories as tend to go, the data doesn’t prove or disprove it.

Las Vegas is the worst performing city in the Case-Shiller 20 cities index. Home prices in that market are down 62% from their peak and down 9% in the year ended November 2011, according to Fitch. However, Nevada, which has $1.2 billion in CMBS multifamily loans, has a delinquency rate of 32.6% making it the third worst geographic area for CMBS delinquencies. Las Vegas and Nevada thus seem to refute the theory about the inverse relationship.

Still, if you look at New York, the theory seems to hold up.

The second best performing city in the Case-Shiller index is New York City. However, New York City has four big problems in multifamily CMBS, according to Fitch. These four loans were originated with the belief that they could be converted from stabilized to market rents, have not performed according to their business plans. Peter Cooper Village and Stuyvesant Town, The Belnord, The Savoy and Riverton loans total $3.6 billion. All were delinquent at the end of 2011.

In January 2012, the Belnord became current although Fitch Ratings expects it to go delinquent again by the summer.

Including these four large loans makes the New York CMBS multifamily delinquency rate 56.7% – the worst of all states. But excluding them reduces the delinquency rate to 3.4% and puts New York right in the middle as the 25th best performing state, although far closer to the better end of the spectrum.

The answer doesn’t get any clearer looking at California and Texas, two of the top three states that account for the largest volume of multifamily CMBS loans.

California is one of the poorest performing states for declining house prices. Three cities, Los Angeles, San Francisco and San Diego are included in the Case-Shiller 20 city index and all three have experienced at least a 40% decline in their respective index from peak to November 2011. For CMBS, California is the state with the third greatest exposure to multifamily, behind Texas and New York, with $6.2 billion in outstanding loans.

However, its delinquency rate for CMBS multifamily loans is just 4.4%, less than a third of the overall multifamily delinquency rate. This supports the theory about the inverse relationship between residential housing prices and CMBS multifamily delinquencies, Fitch noted.

Texas, with $7.2 billion in CMBS multifamily loans, has a 60 days plus delinquency rate of 6.2%, putting it in the middle of the pack in terms of delinquencies. Dallas, the only Texas city in the Case-Shiller 20 city index, had just a 9.2% drop in housing prices from peak to November 2010, making it the best performing city in the Case-Shiller 20 cities index.

So Texas, which has had stronger economic activity over the past few years and seems to have maintained both the residential housing and multifamily apartment sectors, and Nevada, which has had very poor economic performance, seem to disprove the theory.

Reprint from CoStar.com           By Mark Heschmeyer

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Categories: multifamily, Uncategorized
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