Regional Banks Are at Risk from Multifamily Loans

While certain metro areas that had significant demand during the epidemic now exhibit weakness, others that were hardest hit during the pandemic now show strength.

Data is beginning to indicate that there may be greater pressure on the multifamily segment than many people expected. Based on September’s CMBS payment rates, Moody’s Analytics CRE recently raised the topic of whether multifamily was anything to be concerned about.

In their research of other property types, they were “quite surprised to see a particularly poor September showing for Multifamily.” “The payout rate for multifamily has been exceptionally high throughout the year. Only February (82.8%) and April (92.8%) had payout rates less than 95% before September. The September figure was an astounding 71.7%. This was particularly unexpected considering that three of the year’s top four payoff months had just ended.

Trepp now takes a different tack when explaining how multifamily may have become a threat to regional banks in addition to office.

Research analyst Emily Yue for the company stated, “Trepp estimates that $351.8 billion in multifamily bank loans will mature between 2023 and 2027 based on the Fed Flow of Funds data.” In this analysis, Trepp looks at trends in criticized loans in the multifamily markets in the United States. It takes into account the effect of recent developments on the growth of rental income as well as elements like higher interest rates, more stringent bank regulations, and tighter liquidity, all of which have limited refinancing options.

Trepp ranked the default risks of metropolitan statistical regions (MSAs) based on the greatest outstanding balances of multifamily loans. The ratings range from 1 to 9, where 1 represents the lowest risk and 6 or more is considered a “criticized loan.”

The percentage of multifamily loans that have been criticized varies significantly among U.S. geographies; some areas that have weathered the pandemic well are beginning to show signs of weakness on the periphery, while other areas that were severely affected by the pandemic are beginning to recover, Yue stated. From Q4 2021 to Q2 2023, the percentage of criticized multifamily loans decreased in three multifamily markets while it increased in the remaining ones. While some of these metros have seen spikes or declines in the rate, most have seen a delinquency rate that has remained close to 0.0%.

In a dramatic turn of events, some of the metro areas most severely damaged by the pandemic are now exhibiting strength, while others with robust rental demand are displaying weakness. Furthermore, over thirty percent of multifamily debt is held by banks.

In Q2 of 2021, New York had a 31.0% loan criticism rate. The biggest decline of all was shown in the percentage by the same period in 2023, which was 16.3%. However, as the delinquency rate increased from 0.9% at the end of 2021 to 1.9% in Q2 of 2023, this does not by itself provide assurance of safety.

The Phoenix area, a hot market during the epidemic, is an illustration of the second dynamic. In contrast to 2021 and 2022, asking rents have been declining in the first half of 2023. At midyear, the overall percentage of vacancies was 9.3%, whereas the national average was roughly 6%. Although there is currently no delinquency, “the increase in the criticized loan share is indicating perceived risk coming down the line for these loans due to oversupply and looming concerns of a recession.”

The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for multifamily properties for sale.

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