Despite projections showing increased demand for apartments will spur multifamily growth in 2012, analysts viewing December data on commercial mortgage-backed securities say multifamily loans are the worst performing mortgages.
CMBS analytics firm Trepp said the multifamily delinquency rate fell 61 basis points in December, but remains elevated at 15.57%.
Trepp said the delinquency rate for all U.S. loan in CMBS rose seven basis points to a delinquency rate of 9.58% in December, after falling 26 basis points in November.
“We noted last month that further improvements would be hard to come by,” said Manus Clancy, senior managing director of Trepp. “We view this as the first of a six- to 12-month stretch where the rate could increase by 75 basis points in aggregate. This will come as a result of the first wave of 2007 originated loans reaching their balloon dates over the next few months.”
Barclays analysts outlined a similar trend in a research note, saying multifamily and lodging mortgage maintained the highest delinquency rates of 14.1% and 12.9%, respectively. Still, Barclays said those loan segments saw their delinquency rates experience a decline of 60 basis points from the prior month.
As for why there is a discrepancy between 2012 multifamily forecasts and the December 2011 delinquency rate, Trepp senior managing director Manus Clancy points to the idiosyncratic nature of the CMBS space.
“You have two things going on that drives the numbers (in terms of delinquencies) higher,” he said.
Clancy says some enormous multifamily loans were taken out by borrowers who believed they could acquire rent-stabilized buildings and then convert them into market-paying units. But that business model failed, leading to a higher delinquency rate.
Another factor stems from multifamily borrowers simply taking on too much. “You saw big borrowers who just got overextended, they borrowed too much on their properties,” he says. Many of those loans are now contributing significantly to the multifamily vacancy rate, according to Clancy.
However, demographic studies still show there is an opportunity to build in the multifamily space at this point. “Investors love the multifamily space,” he said. “The income is desirable.”
He added, “There is opportunity for guys with dry powder, who have money to spend to buy some of these existing properties at prices that are more sustainable.”
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