When an apartment loan goes into default, the bank ends up getting a recovery rate of about 63 percent, according to an analysis from New York-based research firm Real Capital Analytics.
That puts apartments in the middle of the commercial property sector, according to RCA. However, all multifamily is not created equal. Built or converted condos usually garner about a 55 percent recovery rate, which is the amount the asset was resold for divided by the amount the bank was owed, according to RCA.
There are a number of reasons for this eight percent difference. For one, condo loans are larger at an average of nearly $23 million, which is almost double that of distressed rental properties, according to RCA. These projects are often in larger and overbuilt markets. "The original condo projects were more ambitious,” says Ben Thypin, senior market analyst for RCA.
The RCA report also claims this difference is because of uncertainties surrounding the condo units that the buyer doesn’t own, namely the association and the leasing risk of buying condos in an empty building. “If you go in and buy a pool of units in a fractured building, you have on-site competition for the rental pool,” says Nicholas Michael Ingle, director of capital markets for Phoenix-based Hendricks & Partners, a national multifamily research and advisory firm. “You don’t have as great a degree in control in setting rental rates. Someone may have to capitalize and recapitalize the homeowners association.”
With all of those issues surrounding condos, you might think that the recovery rate difference should be in double digits. But Ingle says there are enough similarities to keep prices closer. “The recovery amount of apartments and condos will be very similar because they’ll be operated as rentals,” Ingle says. “You have the same type of zoning and same type of architecture, you just have a slightly higher finish when you talk about condo projects.”