Research - JUNE 13, 2018

U.S. CMBS multifamily sector remains ‘biggest winner’ post-crisis

by Jody Barhanovich

The U.S. CMBS multifamily sector has remained the biggest winner since the 2005 post-crisis, according to analysts from Commercial Real Estate Direct and Trepp in The Mid-Year 2018: Evolution of the CMBS Comeback report.

The homeownership rate, which stood between 67 percent and 69 percent from 2005 through 2007, plunged to 64.2 percent in the first quarter of 2018, according to the United States Census Bureau. The rate declines even more, according to age, with the homeownership rate for those who are less than 35 years old dropping to 35.3 percent in the first quarter from a peak of 43.1 percent in 2004 and 41.7 percent in 2007.

However, multifamily completions are at a level the report hasn’t seen since the early 1990s.

In May, the overall Trepp CMBS Delinquency Rate hit its lowest level since the 2008 financial crisis in May. The overall delinquency rate for U.S. commercial real estate loans in CMBS is now 4.12 percent, a decrease of 24 basis points from the April level. The May 2018 rate is 135 basis points lower than the year-ago level. The May reading breaks the previous post-crisis low of 4.15 percent in February 2016. The all-time high of 10.34 percent was registered in July 2012.

Multifamily inched up in May by 1 basis point to 2.27 percent and remains the best-performing major property type.

Supply and demand dynamics have remained well balanced since 2014, indicating that demand has been healthy enough to absorb the elevated supply. The national vacancy rate has remained below 5.5 percent, according to UBS.

But a slowdown in the multifamily sector is expected, says the report. Multifamily permits and starts are down 11.4 percent and 9.8 percent, respectively, since 2015. UBS predicts a flattening or reduction in multifamily permits over the next two years in most major markets.

Freddie Mac, meanwhile, predicts that demand for apartment units will remain healthy. But the double-digit value gains to which investors have grown accustomed will be reduced to single-digit growth rates. UBS also expects property-level net operating income to continue its steady climb for at least the next three years.

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