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Multifamily delinquency rate decline implies strong market

Sector demand could bolster property values

Multifamily mortgage delinquency rates dropped in the second quarter of 2013, according to a report from the Mortgage Bankers Association, further indication that the multifamily market is picking up alongside the recovery in housing. Commercial loans overall saw a decline as well.

"The quarterly decline in the delinquency rate of loans held in commercial mortgage-backed securities was the largest on record, and delinquency rates for loans held by life companies and the GSEs remain low and fell lower during the quarter," said Jamie Woodwell, vice president of commercial real estate research at MBA.

The analysis from the MBA studies commercial/multifamily delinquency rates for five of the largest investor-groups: commercial banks and thrifts, CMBS, life insurance companies, Fannie Mae and Freddie Mac. These groups hold more than 80% of commercial/multifamily mortgage debt outstanding when combined.

For multifamily loans held by Freddie Mac, the delinquency rate was 6.72 percentage points lower than the series high of 6.81% in the fourth quarter of 1992. The delinquency rate for multifamily loans held by Fannie Mae was 3.34 percentage points lower than below the series high of 3.62% in the fourth quarter of 1991.

In the second quarter of this year, the 60-plus day delinquency rate for commercial and multifamily mortgages held in life company portfolios inched down 0.01 percentage points to 0.08%. The 60-plus day delinquency rate for multifamily loans held or insured by Freddie Mac dropped 0.07 percentage points to 0.09%.

For multifamily loans held or insured by Fannie Mae, the 60-plus day delinquency rate dropped 0.11 percentage points to 0.28%. The 90-plus day delinquency rate for loans held by FDIC-insured banks and thrifts dropped 0.26 percentage points to 2.16%, while the 30-plus day delinquency rate for loans held in CMBS dropped 0.74 percentage points to 7.81%.

Based solely on the unpaid principal balance of loans at the end of the second quarter, delinquency rates for 60-plus day loans for Freddie Mac was 0.09%, while Fannie Mac loans saw a delinquency rate of 0.28%.

Freddie Mac Chief Economist Frank Nothaft told HousingWire that the multifamily sector is continuing to strengthen significantly and should continue doing so going into 2014.

”There have been a lot of very positive developments in the multifamily apartment market,” Nothaft said. Delinquency rates dropping and rates rising are both important for the multifamily market because it implies the revenue flow is improving, he added.

“As the cash flow improves for the owners and landlords of the apartment buildings, that helps to support their payments they need to cover their expenses,” Nothaft said.

The economist added that economic fundamentals have been very positive for the multifamily apartment market as a result of rents increasing over the past couple of years. Nothaft added that multifamily values fell during the Great Recession parallel to a drop in single-family home values; however, the multifamily market started to improve sooner.

Multifamily values are up a fair amount over the last three years, said Nothaft. They’re not at the peak levels that they were at in 2006, but they have come back and they’re about 8-10% below where they had been at their peak. “It’s much better improvement in valuation compared to single-family properties,” he added.

Low vacancy rates coupled with a strengthening economy, which will support household formation for young potential renters, will keep the multifamily sector healthy moving into next year. "Demand will support cash flow and will maintain stability with property values nationwide," said Nothaft. “It’s important to have a good cash flow," he added.

Fannie Mae Multifamily Economist Kim Betancourt said there has been ongoing demand in multifamily, both from the tenant side and the sales side of properties. "There's been a big increase in demand for purchasing these multifamily properties," said Betancourt.

Looking ahead to 2014, Betancourt said demand will remain strong, but it is unlikely that factors such as rising rates and increasing home prices will have a strong effect on demand. "It's not going to have the steep increase that it had in the past because now we're in a more moderate cycle," she said. Betancourt added that multifamily has its own demographic, so those who are unable to own a home are more likely to rent single-family homes rather than renting an apartment.

"We anticipate it's going to continue to be a nice, steady improvement for the multifamily sector," said Betancourt, who expects the delinquency rate to continue falling as we approach 2014. "To me, there's no reason why that number shouldn't continue to decline."

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