If you thought the multifamily industry bottomed out in 2009, hold on to your hats. The murky depths of the Great Recession are still to come. It could be another few quarters before the multifamily industry reaches the bottom of the current cycle, according to several recent reports.

More overleveraged developers and owners, surviving on loan extensions, will be forced to turn in the keys in 2010 as fundamentals continue to fall before the market hits bottom around the end of the year. Once there, value declines will approach about 40 percent, on average, from the mid-2007 peak—the worst decline since the Great Depression and worse than seen in the early 1990s. Those are just some of the sobering conclusions reached by The Emerging Trends in Real Estate report, recently released by the Urban Land Institute and PricewaterhouseCoopers.

While there have been much fewer “fire sales,” than in the RTC days, “the quickness at which fundamentals have declined, and the pace at which values have deteriorated, is the difference between now and then,” says Susan Smith, director of real estate advisory practice at New York-based PricewaterhouseCoopers. “If the commercial real estate market doesn’t improve fast enough to increase values, and you can’t refinance because your property value is down 30 percent, you’re going to either have to come up with a lot more equity or sell.”

Additionally, multifamily cap rates are expected to rise at least another 30 basis points, on average, ending 2010 at around 8 percent nationally, forecasts the report. The report also predicts that another 100 banks could fail this year, as consensus grows among regulators, lenders, and borrowers that “amending and extending” has reached the point of diminishing returns.

The good news is that multifamily will be the first commercial asset class to recover, the only “with a hint of hope” sector based on demographic demand and constrained supply. “It’s the most preferred investment class right now for most investors,” Smith says. “It’s the one property sector where you’re still able to get relatively-decent financing.” The top markets for multifamily investment include Washington., D.C.; San Francisco; Los Angeles; Seattle; and San Diego (with Boston and New York close behind), according to the survey.

Grubb & Ellis' recently released 2010 Real Estate Forecast echoes the Emerging Trends report, indicating that commercial real estate fundamentals will decline more slowly in 2010, bottoming near the end of the year. The report also predicts that as more distressed assets hit the market in 2010, a 20 percent to 30 percent increase in sales volume over 2009 levels will occur. The top five markets for multifamily investment include (in order): Los Angeles; Washington, D.C.; Orange County, Calif.; San Diego; and Oakland/East Bay, Calif.

CMBS Delinquencies Climb

The excesses of the CMBS market will continue to loom over the multifamily industry in 2010 as delinquencies mount. The percentage of CMBS loans 30 or more days delinquent has gone above 6 percent for the first time in the sector’s history, according to a recent report from New York-based research firm Trepp. The multifamily rate grew 49 basis points in December, climbing to 9.27 percent, a 325 percent increase from where it started 2009. In all, the CMBS delinquency rate rose more than 500 percent in 2009, from 1.21 percent to 6.07 percent.

But the 60-day delinquency rates are a little more palatable, ringing in the New Year at 4.71 percent overall, and 7.5 percent for the multifamily industry, according to New York-based Fitch Ratings. The amount of total dollars delinquent in the multifamily industry grew from $1.6 billion at the end of 2008 to a whopping $5 billion at the end of 2009.

But brace yourself: The worst is yet to come. “Though delinquencies have increased approximately five times from a year ago, they may not peak until 2012,” says Mary MacNeill, managing director of Fitch. “An increased amount of loans are coming due over the next two years that will result in delinquencies possibly peaking at 12 percent.”