Analysis by David Salz and Thomas P LaSalvia, PhD
The beginning of August appears to mark an inflection point in commercial real estate loan performance. Six months into the COVID-19 crisis, we recognize that many economic supports have expired and new ones are still being debated by our political parties. We are also at a crossroads of soon ending forbearance mandates, exhaustion of property reserves, and the end of prohibitions on evictions. In addition, the initial cause of this crisis, COVID-19, continues to sustain its threat to our health and thereby restrict social interactions.
With no doubt, multifamily properties have performed far better than expected by most in early March. Second quarter data shows a lack of stress on both the capital and space markets. National vacancies remained below 5% and asking and effective rents declined by a modest 0.4% in the quarter. Transaction volume is certainly stunted, but the few deals that are occurring are not at bargain prices. For the sector to maintain this stability, progress and confidence in controlling the spread of the virus, and new economic support from the government and central bank are needed. The support would directly affect multifamily tenants’ ability to pay rent, while the slowing of the virus would boost the prospects of the hard-hit retail and lodging sectors, lessening the cross-sector impacts.
From a CMBS perspective, we begin our examination of multifamily properties by looking into the current conditions of agency and non-agency loans, which cover different property classes. As expected, the incidence of forbearance in agency loans (in this case, Freddie loans), is much higher than their cousins in non-agency deals. This is in part related to the early mandate from FHFA. Overall, we see agency loans showing an approximately 2.5% modification rate versus the non-agency rate of less than 0.5%. Digging further, we see that approximately 15% of agency loans with a preceding year debt service coverage ratio (DSCR) of less than 1.2x have been modified, versus a little more than 2% of the non-agency loans meeting the same DSCR criteria.
The pie charts highlight the regional concentrations of multifamily loans with a DSCR of less than 1.2x and those modified in the last few months. The Northeast leads the way for both loan types, with the New York MSA attributing 31% of national non-agency modifications and 17% of agency. No other MSA nears 10%.
These regional cohorts will serve as the basis for further research assessing multifamily loan performance in the context of the changing employment picture, virus penetration, and the evolution of government support.
David Salz leads the Moody’s Analytics CMBS desk within the Structured Content Solutions group, providing timely and insightful data analytics to CMBS and CRE professionals. Prior to his current role, he managed the ABS desk and worked on various CLO related projects.
Thomas P LaSalvia, PhD is a Senior Economist in the research and economics department at Moody’s Analytics REIS.