Home > Financing and interest rates, multifamily, Uncategorized > Apartments – The Belle of the Ball, Except for CMBS

Apartments – The Belle of the Ball, Except for CMBS

By any measure—except one—multifamily is the belle of the ball in commercial real estate. It’s the asset class domestic and foreign investors alike are clamoring for; it’s considered to be more immune to the vagaries of the economy than, say, office or retail; it’s the sector for which still-cautious lenders are ponying up construction financing. And, as NAREIT’s Calvin Schnure told GlobeSt.com earlier this month, it’s also leading the REIT parade, with apartment REIT price returns up 225% since the market trough of March 2009.

However, it’s also the sector with the highest CMBS delinquency rate. Fitch Ratings on Friday said late-pays for loans backed by apartment assets rose last month to 13.30% of Fitch-rated CMBS in the sector, up from 13.04% in January. Standard & Poor’s put it at 13.58% at the end of December 2011. At the start of the previous recession, that delinquency rate was 1.10%.

As Jerry Seinfeld used to say, “What’s up with that?” S&P credit analyst Larry Kay offers some insights: although the multifamily delinquency rate has improved somewhat in recent months, “we believe that a significant decline will remain elusive until rents firm and there are fewer concessions available among class B and C apartments, the weakest housing markets strengthen and troubled New York City rental conversion projects resolve their issues,” Kay says in a statement. “The path to recovery for multifamily CMBS will also depend on the level of job growth in the various markets, which will influence the timing and extent of the local property markets’ progress.”

One theory has it that there’s an inverse relationship between single-family housing prices and apartment CMBS delinquency rate, says Fitch. “Multifamily performance should be strong where residential performance is weak and vice versa,” according to Fitch. “As people lose their homes to foreclosure etc., one of their options is to move into rental housing, traditionally provided by multifamily apartment units.”

There are exceptions. Las Vegas is one: both the single-family and apartment sectors there are in bad shape. At first glance, New York City would seem to prove the theory. The second-best performing city among the Case-Shiller Index’s roster of 20 cities, it’s also hobbled by an apartment delinquency rate that pulls New York State to the bottom rung among the 50 states with 56.7% of CMBS loans in arrears.

A closer look at the New York performance numbers, though, tells a much different story. That 56.7% figure includes the King Kong of apartment CMBS delinquencies, the $3-billion Peter Cooper Village/Stuyvesant Town securitization. The property’s ownership, a partnership led by Tishman Speyer Properties and Blackrock Real Estate, handed back the keys two years ago after a plan to deregulate apartment units and charge higher rents for incoming tenants didn’t unfold on the projected timetable. Subtract Stuy-Town and a handful of other large securitizations on Manhattan properties that followed a similar business model, and New York State’s multifamily CMBS late-pay rate falls to 3.4%.

On the other hand, there’s California, whose three cities in Case-Shiller are among the worst-performing in the index and whose multifamily CMBS delinquency rate is just 4.4%. It ranks third among states for exposure to multifamily CMBS, with $6.2 billion in outstanding Fitch-rated loans. Meanwhile, only Nevada, Florida and Georgia appear on the rosters of both the worst-performing Case-Shiller cities and the states with the highest apartment CMBS delinquencies, suggesting that the inverse-relationship theory isn’t far off the mark.

The next several months could see a reversal of the slight improvement in apartment CMBS late-pays. “2012 is a big year for multifamily loan maturities, with over $7 billion scheduled to mature,” according to S&P. “Moreover, approximately $3.8 billion of these maturities are five-year term loans originated in 2007, when underwriting was very aggressive. The recent contraction in commercial real estate lending and investment activity could complicate refinancing of these loans and thereby push multifamily delinquencies up again.”

Reprint from Globest .com             by Paul Bubny

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