In 2009 and 2010, a lot was written about the calamitous effects that waves of CMBS maturities could have on the market. But by 2012, it appears, those ominous clouds hanging over the apartment industry were disappearing as a flood of capital cascaded into the market, bailing out many of the once-overleveraged borrowers. Right now, prices are 27% above the 2007 levels. 
Source: Real Capital Analytics
Now, as 2006 and 2007 originations come due, the apartment sector is in much better shape than other commercial property types (see graph above). A new report from Real Capital Analytics (RCA), using the research firm’s proprietary CPPI Index, estimates that just over one-third of all CMBS loans of this vintage maturing in 2016 and 2017 will require either additional capital in the deal or be worth less than the original loan. But only 9% of all apartment loans will need additional capital or face refinancing challenges. In comparison, 45% of all retail loans face these hurdles.

“Our key finding is that the wave of 2016 and 2017 maturities will not lead to massive defaults and foreclosures,” RCA says in the report. “If anything, there is an opportunity here for those involved in mezz lending as well as potential for higher sales volume as owners extract remaining value directly.”

Taylor Snoddy, managing director in Transwestern’s Dallas multifamily group, was working on three deals of mid-2000s vintage in March, and he sees even more on the horizon.

“The 2005 to 2007 time frame saw a huge amount of transactions,” Snoddy says. “Those 10-year loans are coming due now. We’re definitely seeing that coming. We expect to see that over the next couple of years.”

RCA says major metros have the fewest problem loans, though Chicago has the highest concentration of loans needing additional capital, with 40% of the city’s $2.7 billion in outstanding loans requiring additional monies. By comparison, Manhattan, a much larger market, has just $400 million in outstanding loans.

Not surprisingly, tertiary markets, the last to recover, see the biggest problems. In these markets, almost half of all loans still face difficulty. In the Southeast, for instance, tertiary markets have $5.9 billion worth of loans that will need additional capital for refinancing. Loans in tertiary markets in the Northeast and Mid-Atlantic have seen their prices recover more quickly, due to their proximity to the East Coast hubs—Washington, D.C.; Philadelphia; New York; and Boston.

While money is flooding into the cities, those same dollars, by and large, avoid tertiary areas, which helps depress values in those markets. “The private-equity firms want scale,” says Brian E. McAuliffe, senior managing director for Los Angeles-based CBRE Group.

And, it’s definitely tougher to find scale and place large amounts of money in areas with less-certain employment situations and lower-cost assets.