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Multifamily Update: Delinquencies Low and Sentiment High

Jul 15, 2020 by Brad Cartier

As real estate investors, we are always on the lookout for more and better data to help us make informed investment decisions. Over the past few weeks, there has been a slew of new data that multifamily investors must understand and digest. Much of this data is positive, which means holders of well-producing multifamily assets are in an economically advantageous position despite the ongoing pandemic.

Here's an overview of this new multifamily data, the impact of delinquency and sentiment on investors in this asset class, and the positive long-term trends in this sector.

Multifamily delinquencies

According to the Mortgage Bankers Association's (MBA) latest Commercial/Multifamily Delinquency Report, delinquencies for the multifamily sector remained low. For instance, delinquency rates for the first quarter of 2020 in the commercial mortgage-backed securities (CMBS) category of loans sat at 1.79%. This rate was at 2.07% in the fourth quarter of 2019, and at 2.61% in the first quarter of 2019. By way of historical comparison, this delinquency rate was 4.53% by the end of 2016, showing a robust lending sector even heading into 2020.

Jamie Woodwell, the MBA's vice president of commercial real estate research, commented on the news, noting, "This year's first quarter marked the end of a long period of extraordinarily low and stable delinquency rates for commercial and multifamily mortgages."

Woodwell furthers, "With the onset of the COVID-19 pandemic and our social and economic responses to it, more recent data from MBA and others show increasing pressure on delinquency rates, particularly for loans backed by hotel and retail properties -- where the impacts have been most immediately and dramatically felt."

It will be critical to keep an eye on delinquency rates moving forward as many real estate asset classes and investors feel the long-term pressure of the ongoing pandemic. That said, multifamily appears to be a bright spot for the real estate sector generally.

Multifamily sentiment

The Commercial Real Estate Development Association (NAIOP) released its June Coronavirus Impacts Survey results, showing strong sentiment toward multifamily acquisitions and development. According to the survey, the proportion of respondents who reported multifamily building acquisitions and development increased from May to June 2020. Specifically, reported multifamily acquisitions jumped since May, from 35% to 49%.

That said, the recent National Association of Home Builders (NAHB) Multifamily Market Survey (MMS) found that confidence had weakened in the multifamily market in the first quarter of 2020.

According to NAHB Chief Economist Robert Dietz, "Like other sectors of the housing market, the multifamily market has been greatly affected by the effects of the pandemic." "On a positive note," he added, "while multifamily construction has slowed significantly in the spring, rent revenue is coming in above some market participants' expectations from a few months ago."

It will be critical for multifamily investors to keep an eye on second-quarter results from NAHB to keep a pulse on market sentiment.

Multifamily rents

Multifamily rents are another positive indicator of the health of this sector. According to the National Multifamily Housing Council (NMHC), 77.4% of renters had paid rent as of July 6. This is only a 2.3% decrease from the same time last year, despite the significant economic headwinds facing most renters. This also compares to 80.8% of renters who had paid by the same time in June.

Doug Bibby, the NMHC president, notes, "It is clear that state and federal unemployment assistance benefits have served as a lifeline for renters, making it possible for them to pay their rent." "Unfortunately," he added, "there is a looming July 31 deadline when that aid ends. Without an extension or a direct renter assistance program, that NMHC has been calling for since the start of the pandemic, the U.S. could be headed toward historic dislocations of renters and business failures among apartment firms, exacerbating both unemployment and homelessness."

As such, keep a close eye on the data for August and September rents as federal subsidies end and economies slowly reopen.

The bottom line

Multifamily rents have been relatively stable, sentiment has seen a significant decrease, and delinquencies are still at record lows. Despite the positivity in the multifamily sector, investors in this asset class should keep a close eye on the data in the coming months.

Those looking for distressed multifamily assets may be waiting a bit longer given the robustness of this sector. Multifamily investors with producing and stable assets are well-positioned to hold on to these properties for the foreseeable future as housing looks to lead the economic recovery.

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