Analysis by David Salz and Thomas P LaSalvia, PhD
While multifamily is still expected to hold up better than all other sectors save industrial, mounting amounts of evidence indicate some trouble is on the horizon, especially for dense urban areas like Manhattan and San Francisco. To date, the sector has benefited from broad aid provided to agency multifamily borrowers and aid to tenants through the CARES Act. As we have noted recently, the expiration of the stimulus and the inevitable increase in tensions between non-paying tenants and landlords with mortgages may affect the sector’s stellar performance. As repeated regularly, the pathway to stability is an increase in jobs and income which is dependent, in the long-term, upon conquering COVID-19 and, in the short term, additional stimulus. The timing of a vaccine and its implementation will define the ultimate performance of this and other sectors.
Stresses in the sector are expected in student and senior housing for obvious reasons. High rise buildings may suffer from higher vacancies and reduced rents, but it is too early to see the impact on long term performance. Cities will rebuild once again as culture becomes a magnet, but it will take time and creativity and some cities will do better than others in recovery. The agency mandate to support affordable housing has served it well with essential workers and continued construction activity providing employment.
To observe cracks, we are monitoring delinquencies and changes in occupancy. For the first time, we have witnessed a spike in late payments in the sector for both agency and non-agency loans. Now, thirty days of performance does not make a trend, but the magnitude of change is noteworthy. Nevertheless, the amount of the change is miniscule relative to changes we have witnessed in loans for retail and lodging properties. We will be watching this carefully as remits come in this month and thereafter.
Watching out for occupancy levels is tricky. Not all multifamily properties report on a quarterly basis, and the reporting can be delayed. Knowing that occupancy is helpful, but loans on some properties can sustain shifts better than others with, among other things, less leverage or higher rents. We are monitoring loans that have reported occupancies as of June 30th. In both agency and non-agency multifamily loans, we have a pool that represents about a third of the respective outstanding balance. Approximately 3% of this pool, both agency and non-agency, shows at least a 10% drop in occupancy compared to its vacancy as reported in its last full year, mostly December 31, 2019. We do not know when the occupancy drop occurred; if it happened early in the quarter, it would be reflected in the quarterly financials but otherwise not until next quarter.
To add clarity to the occupancy reports emerging from CMBS, we utilize preliminary Q3 estimates of Moody’s Analytics REIS multifamily data. While Moody’s Analytics REIS surveys do also indicate signs of growing pandemic related stress, the stress is more definitive on the rent side. While national vacancy will likely finish above 5% for the first time since 2012, it is the quarterly decline in asking rent of greater than 1% that has gotten our attention. For reference, Great Recession quarterly declines were more in line with 0.5%. From the metropolitan level perspective, stress is most prominent in larger dense cities like New York and San Francisco, but even sunbelt cities like Austin have felt some pain.
With all of the aforementioned caveats, multifamily, while not facing the worst of the economic stress, does face headwinds and will certainly not make it out of the pandemic unscathed. Given a continued increase in permanent unemployment and vast uncertainty regarding any stimulus (currently a full relief package is off the table until post-election, but potential targeted household relief is still possible), the situation is evolving and must be monitored closely over the next few months.
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.