Distress is piling up in the multifamily market, but it’s still not as bad the other real estate sectors, according to the most recent Troubled Assets Radar from Real Capital Analytics (RCA), a New York-based research firm that tracks commercial real estate.

According to the report, which measures assets in default, foreclosure, or bankruptcy, to date in 2009, 588 apartment communities, totaling $8.1 billion, fell into distress. Overall, 1,133 apartment communities, totaling $17.7 billion, were in trouble across the country.

Those numbers don’t surprise Debbie Corson, a principal at Atlanta-based Apartment Realty Advisors. “We're getting a lot of calls and doing a lot of opinions of values for lenders, special servicers, and owners who are trying to figure out where the market is and what the value of these assets are,” she says.

Apartments ranked third behind retail and development sites in total troubled assets. But other real estate classes are catching up fast. So far this year, retail ($17.8 billion); hotel ($11.8 billion); office ($8.9 billion); and commercial development sites ($8.6 billion) gained more distressed assets than the apartment market.

Anyone who is following the industry knows there’s one simple reason for this—the financial assistance from Fannie Mae, Freddie Mac, and the Federal Housing Administration.“Multifamily hasn’t had the same liquidity issues as the other asset types,” says Dan Fasulo, managing director for RCA. “On a relative basis, I see a lot more trouble in other property sectors.”

This trouble was exacerbated by the April bankruptcy of General Growth Properties (GGP), which piled $13.5 billion onto the overall commercial distress numbers. Overall, troubled commercial properties have more than doubled this year with the value topping out at $108 billion. In April, $19.5 billion was added to the total, but much of that was fueled by GGP.

“Without GGP, the growth of newly troubled properties moderated slightly in April and May with $5.5 billion of assets added in each month,” the report states. “June, however, is shaping up to be among the worst months of the year with over $10 billion of newly defaulted mortgages recorded so far.”

Patterns of Trouble
RCA’s report also sheds light on which apartment sectors and markets are facing trouble. Right now, a dozen markets around the country have more than $500 million in distressed assets. New York, the most expensive market in the country, leads that list with $2.2 billion in apartments in distress. Miami has $1.5 billion in distressed apartments, followed by Houston ($982.4 million); Phoenix, Ariz. ($959.7 million); and Las Vegas ($931.5 million). (See the complete list below.) In the overall commercial market, Las Vegas (fueled by GGP’s problems), Manhattan, Arizona, and California all experienced problems.

This doesn’t surprise John Cannon, executive vice president at Horsham, Penn.-based lender Capmark Financial Group. “The areas that are showing a lot of distress right now are the Florida, Texas, and California markets and Phoenix and Las Vegas,” he says. “Those markets are probably under the most stress.”

Garden units ($11.6 billion) have the most distress in the sector, followed by high-rises ($7.1 billion); low-income housing ($418.3 million); student ($410.7 million); and senior ($$310.6 million). “The size of the garden apartment market is much larger than the high-rise market,” Fasulo notes.

Unfortunately, one place that RCA doesn’t aggregate distress is by asset class level. Right now, the consensus in the apartment industry is that the lower levels properties were underwritten with riskier mortgages, and, consequently, are facing more stress.

“The lower class deals are the ones that we’re seeing in more distress,” Corson says. “Those are the ones we’re getting to work on. I suspect the lenders will be faster to get rid of the ones they don’t view as desirable.”

Fasulo doesn’t necessarily agree. “I think it has more to do with the market you’re in,” he says. “In a bad market, both your Class A and Class C assets are getting hit harder.

Twelve Markets with the Most Troubled Apartments
Market Dollars (in millions) Number of Properties
Manhattan $2,194 82


Houston $982.4 75
Phoenix $959.7 58
Las Vegas $931.5 37
Orlando $595.8 20
Atlanta $589.3 59
Chicago $553.8 50
Los Angeles $555.2 45 
Broward County $543.1 27
Palm Beach $532    14
Tampa $522.4 22