New Multifamily Slows with Current Fundamentals

MBA (7/22/2008 ) Murray, Michael
Difficulty in financing new multifamily housing developments could affect construction activity as slowdowns occur in property fundamentals.

Gleb Nechayev, senior economist at CB Richard Ellis/Torto Wheaton Research, Boston, said the credit crunch is beginning to affect multi-housing construction activity as financing new development becomes more difficult.

“The reason there is a credit crunch is because of the housing bust, but it is also impacting the fundamentals. For example, there is much less demand for condominiums,” Nechayev said. "While the housing bust and the ensuing credit crunch have not affected multi-housing completions yet, it is only a matter of time before they do."

CBRE/TWR said year-to-date permits would fall below 300,000—a 20 percent drop from the pace of recent years—and completions would decline by a similar magnitude after the first half of 2009, if New York City were excluded from equation. New York City has "an unprecedented surge in apartment and condominium activity," Nechayev noted, largely in part to a rush to obtain permits before a July 1 change in multifamily zoning requirements.

Multi-housing permits issued year-to-date hit 326,000 units, compared to more than 370,000 during the first half of 2007.

Fitch Ratings, New York, said multifamily properties continued to represent a disproportionate number of delinquencies, accounting for 57 percent of all delinquencies last month while representing only 14.6 percent of the Fitch-rated universe. Fitch said nearly $1.3 billion of delinquent multifamily loans remained outstanding, giving the sector a delinquency index of 1.77 percent.

"The loans up for refinance right now are, for the most part, loans originated in 1998. They have some positive things going for them—a relatively high interest rate and amortization so the loan is paid down to the extent that refinance is possible," said Britt Johnson, senior director in CMBS research at Fitch. "We have seen that it isn't as easy as it was to refinance last year. Borrowers are not necessarily refinancing on their maturity date. They may be refinancing two or three months down the road because it takes them a little bit longer to find financing. But they are ultimately finding it."

RBS Greenwich, Greenwich, Conn., and Intex Solutions Inc. reported that as of May, multifamily properties represented more than half of all fixed-rate CMBS delinquencies. Cumulative losses across the 1995 through May 2007 vintages totaled just 0.46 percent, or $3.3 billion through 2,100 disposed loans, RBS Greenwich said.

“It’s not just the credit crunch, but it’s the combination of the economic environment that brought the credit crunch out," Nechayev said. "The credit crunch itself is catching up with the fundamentals that are contributing to slower construction this year."

Despite overall low commercial mortgage delinquencies at Citigroup Global Markets, New York, a block of loans on Texas multifamily properties related to a single borrower continue to affect multifamily delinquencies. The multifamily delinquencies represented 1.51 percent of all its commercial loans last month—down from 1.65 percent in May.

"There are definitely alot of multifamily delinquent loans in Texas, and that's not something new," Johnson said.

Texas, as well as Florida, Michigan and Ohio, had multifamily weaknesses "for many months," but other delinquencies are more specific to certain borrowers and in finding credit to refinance, Johnson added. "A borrower may have a portfolio in a certain market and he or she became delinquent on all of their assets," she said. It is not necessarily a weakness in that market. It is specific to a certain borrower."

Citigroup reported commercial mortgage delinquencies fell two basis points overall but are up five basis points since the end of the year.

"For now, commercial fundamentals appear to be slowing, and we are cautious on the retail and hotel sectors at this stage of the economic cycle,” said Citigroup's research report. “If an economic slowdown is prolonged we expect to see rising delinquency rates from these low levels, possibly in the 1 [percent] to 1.5 percent range over the next 18 to 24 months. We should also say that just natural pool seasoning with only limited issuance should take the overall rate into the mid-60 basis point range by year end.”

“The national apartment vacancy rate is still climbing, primarily due to weak or negative net absorption in a few markets that have a glut of single-family homes and condominiums that were purchased by individual investors who are now either foreclosing or desperately trying to sell or rent the units,” Nechayev said. “In the near term, this trend will prevail, exacerbated by the recent job losses and further price declines.”

Nearly three-quarters of all multifamily markets declined by three points in the Red-Yellow-Green report released this month by Moody's Investors Service, New York. However, 75 percent of multifamily markets also remained solidly within a green range—or a strong market score.

Multifamily property prices increased 2.7 percent from May to June but dropped 3.4 percent overall from last year, said Moody's/REAL Commercial Property Price Indices (CPPI). The CPPI reported apartment property prices in the top 10 metropolitan statistical areas (MSAs) down 2.2 percent for the year after a 1.2 percent increase from May.

“Next year, supply pressure should finally begin to ease in most markets, yet it looks like the improvement in national occupancy will likely be quite modest, in part because of sluggish demand in a handful of large markets,” Nechayev said.