Arbor: Small-Balance Multifamily Well Positioned in Case of Downturn

Small-balance multifamily assets should be well positioned to survive the next financial downturn, reported Arbor, Uniondale, N.Y.

“Underwriting on small multifamily properties, as measured by nearly every key metric of risk, has been conservative compared to the rest of the [multifamily] sector since 2016,” the Arbor Small Balance Multifamily Investment Trends report said. “This apparent risk aversion should portend greater performance resilience when a market correction does occur.”

From late 2015 through late 2018, underwriting trends for small and large multifamily properties tended to diverge, the report said, citing a historically high amount of capital chasing well positioned large multifamily properties. “The net effect has been a tightening in underwriting standards for small multifamily properties as compared to the rest of the sector,” Arbor said.

Arbor noted national average cap rates for multifamily properties backed by small-balance loans have remained between 5.9 percent and 6.1 percent for more than three years. In early 2019, small balance cap rates fell to 5.9 percent, down 16 basis points from a year earlier.

Small-balance property values have generally been stable or increasing, and demand for affordable apartment supply, which small-balance properties often supply, is expected to support pricing over the long term, Arbor said.

Arbor said small-balance multifamily lending could total nearly $50 billion this year at the current pace, which would represent a modest pullback from last year’s $53.1 billion–the highest activity since the financial crisis. “Looking toward the rest of 2019, there is cause for both concern and confidence,” the report said. “Even in the absence of a definitive downside trigger, the growing belief in an impending slowdown may independently act as an impeding headwind to growth.”

But on the upside, favorable long-term demographic trends should support the sector and minimize the effects of any industry-wide pullback, Arbor said.