Multifamily Fundamentals Better than Other Property Types

The Mortgage Bankers Association has released its Commercial Real Estate/Multifamily Finance Quarterly Data Book for the third quarter of 2010, and the organization posits that the real estate cycle is beginning to once again exert itself in commercial and multifamily property markets, and that, on the whole, multifamily is benefiting most from the recovery. “During the third quarter, the economy began to show (modest) growth and absorption picked up in the face of little new space coming on line,” the report says. “The result has been marginal declines in vacancy rates and a firming of asking rents.”

Multifamily fundamentals in particular have improved, though not quite back to where they were during the more flush days of the mid-2000s. During 3Q10, average apartment vacancies nationwide were 7.7 percent, compared with 5.8 percent during 3Q07. Yet among property types, apartments are the healthiest in terms of 3Q10 vacancies: Average industrial vacancies for the quarter were 13.1 percent, and retail and office vacancies were both stuck at 18.8 percent.

Investors are interested in multifamily rentals properties, too—more so than most other property types. Year-to-date as of the end of 3Q10, the sales volume of apartment properties was 97 percent higher than the same period in 2009. Only office properties piqued investor interest more; office sales were up 122 percent during the first nine months of 2010, compared with the same period in 2009. During the third quarter of 2010, prices per square foot were up for apartments and cap rates were down, though not by much. During 3Q09, apartment cap rates averaged 7.1 percent; a year later, they were 6.7 percent.

For commercial and multifamily properties both, lending trended downward during the quarter, driven mainly by banks’ reluctance to make construction loans. “A full $22.5 billion of the drop in banks’ holdings was construction loans, compared to a $7.5 billion decline in loans backed by existing commercial and multifamily properties,” says the report.

This construction loan dearth is showing itself clearly in multifamily starts, which continued to sputter. “The recession’s shadow continues to hang over new construction activity,” the report explains. “Multifamily building permits in November fell to 94,000 on a seasonally adjusted annual rate, the lowest level in the past 12 months. Starts fell to 72,000, and completions fell to a rate of 73,000. The lack of new construction is a clear–and expected response to the stress the recession has brought to the market.”

The performance of commercial/multifamily mortgages was mixed in the quarter, and clearly differentiated by investor group, according to MBA. The 30-plus day (including REO) delinquency rate on loans held in CMBS continued to increase during the quarter, hitting 8.58 percent, a new high for the series. The 90-plus delinquency rate for commercial and multifamily mortgages held by banks and thrifts rose slightly to 4.41 percent, a high for the Great Recession but lower than the levels seen in the early-1990s.