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CRE Finance World, Summer 2012

The U.S. Apartment Sector’s Recovery Hasn’t Trickled Down To Multifamily CMBS Many of the weakest housing markets have unemployment rates Renters Trade Up To Class A Properties that exceed the national average (8.3% in February 2012), which As potential homebuyers wait for the market to turn around, many will likely continue to depress these markets. And considering have upgraded to higher-quality rental units. This has benefited the complexity of the rental conversion projects in New York, we class A properties, which are typically luxury units less than 10 believe these loans will likely remain delinquent for some time. years old, often occupied by white-collar workers. These higher-end Moreover, even if the large Peter Cooper Village and Stuyvesant assets tend to be in stronger markets with high income levels and Town project (with a $2.55 billion trust principal balance) were a higher cost of housing that support continued demand. They’re excluded from the multifamily delinquency rate, the rate would still be also the apartment types that Freddie Mac and Fannie Mae tend to very high at 10.32%. Considering the overall stress in multifamily aggressively bid on, which means they aren’t as common in CMBS CMBS, we don’t expect the multifamily CMBS delinquency rate to transactions as those at the lower end of the spectrum. improve much anytime soon. Class B properties are generally 10 to 25 years old and usually Table 1 have a middle-class tenant base of both white- and blue-collar S&P/Case-Shiller Home Prices: 20-City Composite Index workers, while class C properties are typically at least 30 years old and generally have blue-collar and low- to moderate-income tenants. These properties make up the bulk of legacy CMBS port- folios because conduit lenders were able to offer these borrowers more favorable terms than traditional lenders. We expect debt service coverage levels to be thin due to strained operating cash flows for the class B and C assets underlying many CMBS pools and rental concessions that are still available in these classes (although the extent of concessions varies by market). While appealing to renters, such rent reductions can hurt borrowers’ ability to make their loan payments. Rising employment in the 20- to 34-year-old cohort (which made up approximately 70% of job gains in 2011) should, however, boost demand for these apartment classes. Multifamily Delinquencies Are Likely To Remain High Although multifamily delinquencies have improved a bit recently, we believe that a significant decline will remain elusive until the weakest housing markets strengthen, rents firm among class B and C apartments, and troubled rental conversion projects resolve their issues. 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. A publication of Summer issue 2012 sponsored by CRE Finance World Summer 2012 25


CRE Finance World, Summer 2012
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