Multifamily Loans Pose Risk to Regional Banks - MikeLembeck.com, Orange County Multifamily Broker, Apartments, 1031 Exchanges

Multifamily Loans Pose Risk to Regional Banks

Some metros hit hardest during the pandemic now show strength while others that saw strong demand now evidence weakness.

Data is starting to show that the multifamily segment is facing more pressure than perhaps many realized. Moody’s Analytics CRE recently brought up the question of whether it was time to worry about multifamily, based on September’s CMBS payoff rates.

“We were quite surprised to see a particularly poor September showing for Multifamily in our analysis of other property types,” they wrote. “Multifamily has had a very high payoff rate all year. Prior to September, only February (82.8%) and April (92.8%) have payoff rates below 95%. September came in at a stunning 71.7%. This was especially surprising on the heels of 3 of the 4 best payoff months of the year.”

Now Trepp, in a different approach, explains how multifamily, in addition to office, might have become a challenge to regional banks. 

“Based on the Fed Flow of Funds data, Trepp estimates that $351.8 billion in multifamily bank loans will mature between 2023 and 2027,” wrote Emily Yue, a research analyst for the firm. “In this analysis, Trepp examines trends in criticized loans across U.S. multifamily markets, considering the impact of new developments on rental growth, along with factors like higher interest rates, tighter liquidity, and increased bank regulations, which have cast a shadow on refinancing options.”

Rating default risks from 1 to 9, where 1 is the lowest risk and 6 or above is considered a “criticized loan,” Trepp looked at metropolitan statistical areas (MSAs) and picked 10 MSAs with the largest outstanding balances of multifamily loans.

“There is significant variation in the share of criticized multifamily loans across geographies in the U.S., with some regions that have remained strong through the pandemic starting to show weakness on the fringes, and other regions that were heavily impacted by the pandemic showing signs of recovery,” Yue wrote. “Three multifamily markets saw decreases in the percentage of criticized multifamily loans from Q4 2021 to Q2 2023, and the rest saw increases. The majority of these metros have seen a delinquency rate that has hovered near 0.0%, with others showing increases or decreases in the rate.”

In a reversal of fortunes, some of the metros hit hardest during the pandemic are now showing strength while others that had strong rental demand there are showing weakness. And banks hold more than 30% of all the multifamily debt.

New York had a 31.0% rate of criticized loans in 2021 Q2. By the same period in 2023, the percentage was 16.3%, the largest drop off of any. Though this alone isn’t a guarantee of safety, as the delinquency rate rose from 0.9% at the end of 2021 to 1.9% in 2023 Q2.

An example of the second dynamic is the Phoenix region, which was a hot market during the pandemic. Asking rents in the first half of 2023 have been dipping compared to 2021 and 2022. Overall vacancies were at 9.3% at midyear, compared to the national figure of about 6%. Delinquency is still 0%, “but with over-supply and looming concerns of a recession, the spike in the criticized loan share is indicating perceived risk coming down the line for these loans.”

Article courtesy of Erik Sherman of GlobeSt.com.


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