Multifamily property loans, along with those for hotels, have shown the best performance rebound over the past 24 months of all
commercial real estate property types, according to Fitch Ratings. As the economy has stabilized, the two have been able to mark-to-market more quickly due to shorter term rentals than other property types that have stickier rental streams as a result of longer-term leases.
So why then are these two property types among the worst performing in Fitch Ratings' Loan Delinquency Index?
One answer is for exactly the same reason that they are currently performing better; they marked-to-market earlier on the downside too. And once a loan becomes 60+ days delinquent, its ability to extricate itself becomes difficult as the borrower has less cash flow available to ensure the property remains competitive with its peers.
Some initial analysis Fitch has done shows what multifamily delinquencies look like when the 'rent-stabilized' New York multifamily loans and 'small balance' loans are stripped out.
In 2006 and 2007, issuers underwrote fixed-rate multifamily loans with stabilization plans, whereby rent stabilized units were converted to market. These loans, Stuyvesant Town/Peter Cooper Village ($2.8 billion), The Belnord ($375 million), Riverton ($225 million), and Savoy Park ($210 million) for a total of $3.6 billion did not see their stabilization plans pan out.
In addition several issuers originated small balance commercial loans, many of which were not underwritten with typical conduit guidelines instead using residential origination criteria. They have grossly underperformed compared to the CMBS conduit product.
Removing these loans reduces the multifamily Fitch Loan Delinquency Index from 14.4% to 9.3% at the end of 2011. This moves multifamily from the worst performing of the five asset classes to the middle of the range with office (6.8%) and retail (6.9%) being the best performers and hotel (12.0%) and industrial (10.25%) being the worst.
Both office and retail have the advantage of stickier rental streams through the downturn. Although, Fitch said it expects the office delinquency rate to increase in 2012 as office rents signed at the height of the market five years ago roll to market.
Keep up weekly on national news, trends and property leads with the Watch List Newsletter, a weekly pdf that includes other news and leads not found on the CoStar Group web news pages.
Sign up for the Watch List E-Mail Alert. A new issue is published late each Wednesday
Advertisement:
1st Service Solutions: The Nation's Leading CMBS Borrower Advocate
