The U.S. Apartment Sector's Recovery Hasn't Trickled Down to Multifamily CMBS

CRE Finance World, Summer 2012

The U.S. Apartment Sector’s Recovery Hasn’t Trickled Down To Multifamily CMBS Larry Kay Director Standard & Poor’s Ratings Services T CBRE Econometric Advisors (CBRE). And the National points short of the 2004 peak. With the decline in homeownership,Apartment Rental Conditions Should Remain StrongStarting in 1994, homeownership rose consistently from 64.2% toa peak of 69.2% in 2004 (see chart 1). It then began a multiyeardecline to a 15-year low of 65.4% in first quarter 2012 — 380 basishe U.S. apartment sector is in the midst of a solidrecovery, benefiting from continued strong demand forrentals. Apartment rents rose at an annualized rate of4.5% through the first quarter of 2012, according to Multi Housing Council (NMHC) Apartment Tightness Index — which the number of renter units began a steady climb from 33.7 million uses data from quarterly surveys of NMHC members to measure units in 2005 to 39.5 million units in first quarter 2012. changes in occupancy rates and rents — has also shown improvement. Chart 1 We believe that until home prices stabilize and renters become Homeownership % vs. Renter Units more confident about taking the plunge into homeownership, demand for apartment rentals should remain strong. Yet despite the strong property fundamentals, delinquencies for multifamily commercial mortgage-backed securities (CMBS) are still near record highs. Overview Several factors are keeping delinquencies elevated, in our view. We believe that class B and C apartment properties, which make up the bulk of multifamily collateral typically found in CMBS, were the hardest hit in the housing downturn. That’s because these mid- to lower-end properties were vacated, as potential homeown- ers gravitated to class A apartments while waiting for the housing market to stabilize. Moreover, several depressed submarkets and a few troubled — and very large — rental conversion projects in Source: U.S. Census Bureau New York City are having a disproportionate impact on overall During this period, however, the apartment market also had a multifamily delinquencies. stretch of weakness as the effects of a slowing economy took hold. With a weak job market, slower household formations, and These issues are likely to weigh on multifamily CMBS performance competition from investor-owned condominiums and single-family for some time. And although we’re seeing signs that multifamily homes for rent, the NMHC’s Apartment Market Tightness and Sales delinquencies may be starting to ease, 2012 is a big year for multi- Volume Indices both deteriorated between 2006 and 2008 (see family loan maturities, with over $7 billion scheduled to mature. chart 2). However, these indices — which indicate changes, if any, Moreover, approximately $3.8 billion of these maturities are five- from the previous quarter, with index values over 50 representing year term loans originated in 2007 — a frothy period at the peak improvement — began a sharp ascent in 2009 as home prices of the market. continued to fall (with no relief in sight) and apartment rentals became the favored form of occupancy. The Tightness Index spiked Since reaching its peak rate of 15.5% in June 2011, the CMBS to a record high of 90 in April 2011, and the Sales Volume Index multifamily delinquency rate had declined to 13.39% as of March was also strong at 65. Both indices have since dropped back to 2012 — an improvement since the peak, but nowhere near the rate less robust levels (74 and 57, respectively, as of April 2012) but of 1.1% at the start of the recession. still indicate tightening market conditions. A publication of Summer issue 2012 sponsored by CRE Finance World Summer 2012 23


CRE Finance World, Summer 2012
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