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CMBS fundamentals remain solid

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Commercial mortgage backed securitization defaults, including those for multifamily properties, dropped for the fourth consecutive year and to their lowest level since 2008, according to Fitch Ratings in its annual U.S. CMBS loan default study.

Most notably in the multifamily sector, that is large developments of apartments, vacancies continue to drop. That means rent keeps rising.

The national apartment vacancy rate is now 4.2%, compared to 4.5% in 2012, said Fitch, citing analytics from real estate date provider Reis.

However, Fitch expects market technicals will eventually catch up and release some of the pent-up demand.

"Significant amounts of new supply are beginning to come online in many markets, which could temper additional rent growth and drive up vacancy," reads the Fitch report. "Demographic trends continue to favor a strong rental housing market with a growing population of young Americans, who traditionally rent. Fitch expects multifamily defaults in legacy CMBS to stabilize near current levels."

Multifamily fundamentals remain sound.

The cumulative default rate for multifamily actually fell in 2013 to 17.9% compared to 18.3% in 2012 amid continued high issuance volume combined with a low default rate, the agency noted.

Fitch reported an annual default rate of 0.9% for CMBS in 2013 compared with 1.2% in 2012. The 2007 vintage continues to be the main driver of default, with the office asset classes leading the way.

Annual CMBS defaults dropped 26% in 2013 and finished the year 75% lower than peak levels in 2010. In total, 353 loans with a balance of $5.4 billion defaulted in 2013, compared with 557 totaling $7.3 billion in 2012 and 950 totaling $13.8 billion in 2011.

“Office defaults topped all property types in 2013 and will remain under pressure due to high unemployment, slow job growth and tenants requiring less space per employee,” said managing director Mary MacNeill.

Cumulative defaults in 2013 were 13.5% totaling $84.2 billion.

Fitch expects the rate of cumulative CMBS defaults to hold fairly steady with less than 50 basis points movement by year-end.

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