Large, aggressively underwritten loans are increasingly going south, and declining fundamentals for the multifamily industry mean that CMBS delinquencies are accelerating as the year goes on.
Overall, the multifamily sector has the highest 30-day delinquency rate (5.4 percent as of July 1) of all property types, according to Trepp. A year ago, that figure was just 1.76 percent.
There are various reasons for this, but the main culprit is some incredibly large loans that recently took a turn for the worse, skewing the numbers. First, there’s the New York effect, as several large CMBS repositioning deals have failed, including The Riverton and a $192 million pool for 36 properties called the Upper Broadway Portfolio, which is now on the verge of default.
“If Peter Cooper Village ever falls into that category, hold onto your hat,” says Manus Clancy, a senior managing director at New York City-based Trepp. “That’s the 800-pound gorilla.”
Other large delinquencies include a 51-building multifamily portfolio in San Francisco from The Lembi Group, and The Bethany Group’s Houston and Austin portfolios.
“When a Lembi or Riverton or Bethany goes belly up, those are big numbers that go right to your total,” Clancy says. “When Bethany’s stuff started showing up delinquent, the overall rate went from the high 3 percents to the low 5 percents; that was a big step.”
Clancy believes that if you remove Lembi, Bethany, and some of the larger Manhattan defaults, the multifamily delinquency rate would be in line with other property types. The overall 30-day CMBS delinquency rate for commercial real estate is in the mid-3 percent range, but if figuring in the delinquencies from the General Growth Properties retail portfolio (an issue still being ironed out through litigation), that figure could be more than 4 percent.
Fitch’s May delinquency figures paint a similar portrait. The ratings agency said that the overall CMBS 60-day delinquency rate of 2.07 percent is the highest since the company began its index in 2001. Multifamily leads the charge at 4.55 percent. One of the main drivers of the rising multifamily rate was a delinquency on a $160 million Mansions Multifamily Portfolio.
To stop history from repeating itself, the Treasury Department is reportedly working on new regulations for conduit lenders. The proposed regulations include requiring lenders to retain a meaningful level of risk, maybe 5 percent of the credit risk sold to investors, as well as not allowing them to pay compensation until the performance of the loans has been realized. No formal announcements have yet been made.
Still, the prospect of any CMBS issuances not related to TALF is thin this year. “Aside from TALF, or any kind of government program, it’s probably going to be zero or next to zero for the year,” Clancy adds.