Apartment Construction Begins to Slow but Demand Remains High
By Karina Estrella | Trepp
With homeownership rates sagging over the last 11 years thanks to shifts in demographic trends, apartments have become one of the most in-demand property types. As we wrote in our previous multifamily snapshot, apartment demand rose to its highest level in 25 years in 2017, which is a generational peak. However, some of the sector’s underlying financials are beginning to decelerate – at least when it comes to loans in CMBS. According to Trepp data, the average occupancy for multifamily CMBS loans has been trending downward over the past two years. Average occupancy was measured at a recent low of 93.1% in March, which is 60 basis points lower year over year.
Per Multifamily Biz, construction starts for seven of the 10 largest US multifamily markets dropped in 2017 when compared to 2016. The overall volume of multifamily construction starts was $194.7 billion last year, which is 7% lower year over year. However, it seems that the elevated levels from previous years continue to weigh on occupancy levels.
Despite the deceleration of apartment completions, absorption remains at peak levels across many markets. This indicates apartment demand — driven by millennials, downsizing baby boomers, and increasing single-family home prices — is still extremely high. JLL observes that primary market transactions accounted for 40.3% of US apartment property activity in 2017, down from 44% in 2016 and 48% in 2015. This decrease was largely due to New York City’s sales volume falling nearly 50% year over year. As a result, Dallas-Ft. Worth surpassed NYC as the most active multifamily market for transactions in the country.
Private-label CMBS and Fannie Mae MBS Issuance on the Rise
Fannie Mae data show the housing agency issued $65.4 billion of multifamily MBS debt last year, up roughly 19% from $55 billion in 2016. Private-label CMBS multifamily loan issuance also followed a positive trend. According to Trepp data, apartment loan securitizations totaled $5.3 billion last year, which is up 7.0% from the $4.9 billion issued in 2016.
To be sure, this all pales in comparison to pre-crisis levels before the run-up in GSE market share. The percentage of multifamily loans in private-label CMBS has plummeted since 2008.
Conduit loan LTVs dipped near the end of 2017, but rose back up to 62.2 for loans securitized last month. Conduit multifamily loans issued in 2017 had a weighted-average LTV of 57.6. On the other hand, Fannie Mae loans have reported a relatively flat weighted-average LTV between 67 and 70 since the second half of 2017. According to Trepp data, the average LTV for Fannie loans issued last month slid to 55.9.
Apartment Delinquencies Remain Low but Average Loss Severity Rises
For the first time in eight months, the Trepp CMBS Delinquency Rate rose in March. The March reading of 4.55% is only slightly up from February’s rate of 4.51%. Multifamily loan delinquency dipped slightly from its January and February rates to 2.38% in March. However, the sector’s delinquency rate has remained consistently below 2.5% for the last four months, and it is still the lowest delinquency rate of all major property types.
The monthly liquidation volume for multifamily CMBS loans continues to dwindle as a mere $201 million was written off in March. (Of course, most of this speaks to pre-crisis loans.) The six-period, moving average loss severity receded in the second half of last year. However, that average severity has hiked back up since year-end 2017 and jumped about 10% to 36.4% last month. In March, realized losses neared $100 million for a hefty severity of 59.5%. Of all multifamily loans that were liquidated in the first quarter of 2018, 38.6% paid off with a loss.
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