MBA Newslink Multifamily Roundtable: Rates, Refinancings and Resolutions

(From left: Brian Bailey, Kim Betancourt and Chong Sin)

MBA NewsLink interviewed three analysts, Brian Bailey, Kim Betancourt and Chong Sin, about their thoughts on the multifamily landscape.

Brian Bailey is the Commercial Real Estate Subject Matter Expert in the Supervision, Regulation, & Credit Division of the Federal Reserve Bank of Atlanta. He is responsible for providing thought leadership and monitoring emerging trends in commercial real estate and finance. He provides guidance on industry dynamics, valuation, operations and finance issues.

Kim Betancourt is Fannie Mae’s Senior Director of Economics and Multifamily Research. She manages a team of real estate economists that focus exclusively on the multifamily sector. They analyze current economic conditions at both the national and local level, determining their impact on the multifamily sector and identifying future trends.

Chong Sin is an Executive Director and head of CMBS research at J.P. Morgan. In his role, he regularly publishes to and advises a wide audience of J.P. Morgan’s clients including portfolio managers, analysts, and executives on various CRE and CMBS-related topics. Prior to joining CMBS research in 2014, he was an analyst on the Short-Term Fixed Income and Municipals Markets research teams at J.P. Morgan. Before joining J.P. Morgan, he spent some time at GE Capital and Bear Stearns.

Note: Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. Any opinions expressed are those of the analyst, not their institutions.

MBA Newslink: Brian, what factors are contributing to current multifamily performance and the outlook over the next 12-18 months?

Brian Bailey: There is a confluence of factors, primarily overbuilding and unaffordability, that are slowing and even stalling multifamily performance. These dynamics have pushed vacancy rates higher at multifamily properties over the past two years. While it appears that new construction and unaffordability will continue to influence the market for the near future, multifamily starts have slowed over the past year, which signals that the market is beginning to work toward equilibrium.

Supply Challenges

Construction of multifamily properties (5+ units) during the 2020s has increased to 442,000 units annually; a roughly 50% increase over the 2010-2019 rate of 300,000. A rate over 400,000 units annually has not been experienced since the 1980s, which some consider to be a boom period for U.S. Commercial Real Estate (CRE), especially due to the size of the respective population. In addition to elevated construction, most of the newly constructed apartment properties have been in the high-end, luxury segment. These vast amounts of new construction have helped propel vacancy rates in many major cities to levels not experienced since the early 2000s.

Privately-Owned 5+ Unit Property Starts (Annual Rate, Thousands)
1980-1989	422
1990-1999	231
2000-2009	277
2010-2019	300
2020-Present	442
Source: U.S. Census, FRED FRB STL

Another part of the multifamily supply equation is driven by the shortage of single-family housing. Overall, the United States has constructed only a fraction of the single-family housing units compared to prior decades. Today’s housing industry is constructing single-family housing at rates like those experienced in 1980s and 1990s. While the level may appear reasonable, it should be noted that the U.S. had a much smaller population 20, 30, and 40 years ago.

Privately-Owned Single Family Starts (Annual Rate, Thousands)
1980-1989	989
1990-1999	1105
2000-2009	1226
2010-2019	681
2020-Present	1020
Source: U.S. Census, FRED FRB STL

Unaffordability

Unaffordability is the other sizable issue impacting multifamily. Housing associated costs (property taxes, insurance, and utilities) have risen markedly over the last several years. These cost increases have contributed to making housing less affordable, whether single or multifamily related. This has created more alternative living arrangements. According to Harris Poll done for Bloomberg News in 2023, roughly half of young adults (aged 18- 29) live at home, which is a similar amount to the 1940s. Higher multifamily rents are not only less affordable, but they also make saving for a home downpayment much tougher.

Multifamily market conditions are encountering greater headwinds due to oversupply and in-affordability. At the same time, an overall shortage of housing and modest single- family home construction should create a floor that reduces challenging conditions. The inability to digest the large amounts of new supply will create headwinds for rent growth and moderating vacancy levels for the near future.

These are the opinions of the author and not those of the Federal Reserve Bank of Atlanta, or the Federal Reserve System.

MBA Newslink: Kim, while challenges like rising expenses and decreasing rental growth are top of mind, multifamily continues to perform quite well in many respects. What positive developments are most noticeable?

Kim Betancourt: Many multifamily investors continue to show interest in the sector due to the favorable long-term fundamentals. This includes confidence in long-term demand and the belief that fewer units will be delivered in the future, coupled with an overall shortage of housing that we previously estimated to be more than 4 million units.

One of the most compelling positive developments for the multifamily sector is demographics. That’s because the size of the nation’s age 20-34-year-old cohort is expected to remain elevated over the longer-term forecast. That is a very favorable trend for the multifamily sector in terms of ongoing demand, since this is the group of people most likely to rent a multifamily unit. Many multifamily investors are aware of this trend and, therefore, continue to show interest in the sector.

Projected employment is another positive trend for multifamily. Job growth helps spur new household formations, which tends to favor the multifamily sector. And we are expecting job growth to remain subdued but positive over the next 24 months, thereby helping stabilize demand for multifamily rentals.

Ongoing demand for rental housing is another factor. We believe that demand for multifamily rental housing will remain subdued but relatively stable over the next 12 to 18 months due to homeownership affordability constraints. Many renters who would like to pursue homeownership but are encountering both high interest rates and home prices, as well as managing elevated levels of household debt, are likely to choose to stay in their rental units for another year.

We are also expecting net operating income to improve over our forecast horizon. Although it has slowed quite significantly since last year, this decline is not unexpected. Indeed, the sudden increase in net operating income growth during 2021 and early 2022 was unsustainable in our view and stemmed not only from the sharp spike in rental demand during the pandemic but also from the decline in rental income at the beginning of the pandemic. Indeed, we are expecting net operating income growth to decline this year but then stabilize next year, and then increase in 2026.

However, it’s also important to distinguish between more expensive Class A stock, which is oversupplied in certain places, and Class B/C units, which remain in short supply. Indeed, the vacancy rate for Class B properties is about 2% lower than Class A, and Class B/C units are currently offering lower levels of concessions than Class A units, as well.

MBA Newslink: What are some of the more interesting variations occurring between different markets and types of markets across the U.S.? What trends are driving these variations in performance?

Kim Betancourt: As noted above, job growth helps spur new household formations, but the amount of job growth really varies metro by metro – and there are some that are expected to have above-average job growth over the next 18 months. Fortunately, some of those metros also have elevated levels of new supply entering the market over the same timeframe, including Austin, Dallas, Jacksonville, Las Vegas, Orlando, and Phoenix.

Other metros are experiencing the opposite, with below-average job growth expected, including New York City, Chicago, and Cleveland. While the New York City metro has the highest level of new multifamily construction underway, it continues to suffer from a lack of affordable housing. Hence, lower job growth levels are not expected to negatively impact demand nor improve rental affordability in the metro.

And there are other metros that have new supply but the share of inventory being added is low. For example, new multifamily construction in Boston and Los Angeles account for less than 4% of existing inventory.

There are different types of multifamily housing that are also facing their own unique set of challenges. For example, manufactured housing units that are prefabricated in factories remain an important source of unsubsidized affordable housing for an estimated 17 million residents, according to data from the 2022 American Community Survey. Currently, vacancies remain low at many manufactured housing communities, indicating that demand is outstripping supply. That’s because the development of manufactured housing communities has not kept up with demand. Many local jurisdictions have zoning restrictions against this type of housing, creating barriers to the development of new communities. As a result, building new communities takes a long time, when they can be built at all. We expect the development of new manufactured housing communities will remain limited over the next few years.

MBA Newslink: Chong, what dynamics are you observing play out for multifamily bridge loans? What outcomes do you envision for these types of situations whether on balance sheets or in securitized transactions like CRE CLOs?

Chong Sin: One of the more challenged segments of the multifamily market since quantitative tightening began has been the transitional/bridge multifamily market. Outsized multifamily rent growth combined with low rates catalyzed a flood of acquisition activity in the multifamily market in 2021 and 2022 and a commensurate jump in financing activity. There was a significant amount of short floating-rate debt that was taken out during that time including transitional/bridge financing in which the execution of business plans was baked into the underwriting for exit financing purposes. Much of this transitional financing was securitized in the CRE CLO market, which saw issuance jump to $46bn in 2021 and $29bn in 2022 from the pre-pandemic peak of just $20bn in 2019.

Since then, rent growth has slowed and interest rates have risen materially, causing business plans to be hung and producing suboptimal cashflows and loan delinquencies to materialize as interest rate caps that were coterminous with scheduled maturities expired. Multifamily CRE CLO 60d+ delinquency rates have grown from near zero at the start of 2022 to 4.6% as of the August remit period. But, so far, losses have been extremely limited as CRE CLO managers have been modifying loan terms including extensions to buy time for rate cuts to materialize so that borrowers have a fighting chance to right the ship. Managers have also been buying problematic loans out of CRE CLO trusts at par with the intention of re-levering them on warehouse lines after right sizing the capital structure.

What’s in it for CRE CLO managers to delay outcomes besides avoiding near-term principal losses? For managers with concentrated lending exposures in this space, these 2021 or 2022 executed CRE CLO vehicles are likely their cheapest existing cost of financing so protecting this financing helps manage the degradation of net interest income. Ultimately, modifications and extensions benefit both the lenders and borrowers, particularly for a sector like multifamily that largely does not suffer from fundamental problems.

In the end, we think transitional multifamily is largely a borrower equity issue, where mark-to-market implies that a lot of the aggressively bid equity is heavily impaired, if not fully wiped. For the most part, we do not believe losses will be significant for transitional multifamily debt including CRE CLOs. Deep shortages in affordable housing establishes a floor to how much multifamily valuations can further fall and against a backdrop of falling rates and fast abating construction supply deliveries, we think a combination of better acquisition bids and the employment of junior/mezz lending capital can stave off heavy losses to senior transitional multifamily loans.

MBA Newslink: What trends are you observing in seniors housing and student housing?

Chong Sin: When looking at seniors rental housing, demand appears to be strong. Rent growth eased off its 2022-2023 unsustainable pace, though growth rates remain well above pre-pandemic levels. The sector continues to see individual properties adjust to higher operating and financing costs, and a segment of older properties is yet to experience a sustained recovery. The ongoing decline in the level of new construction, a modest level of new deliveries, and recent rent growth trends continue to be favorable conditions for investors, owners, and operators. However, elevated home prices and mortgage rates could remain a headwind for the sector over the next several quarters if seniors have difficulty selling their homes to free up the funds necessary to move into seniors housing. We continue to believe that the fundamentals of seniors rental housing are in a long-term recovery. Furthermore, the sector could enter one of its strongest periods in terms of demand over the next several years. However, it will need to successfully navigate the next few quarters of likely slower economic growth. Recent levels of increasing absorption should be reassuring to the industry that the burgeoning population of people entering their 80s remains a remarkable underlying engine of the sector’s extremely strong future growth prospects. However, it will still be several years before the industry starts experiencing the full strength of that surge.

Student housing also continues to see improvement in fundamentals. The off-campus student housing sector had been riding a wave of improved demand after finally working its way through pandemic-related headwinds between the spring 2020 and fall 2021 semesters; of course, this was the period when many campuses temporarily shut down. Even though demand stabilized beginning in the spring 2022 semester, the full-fledged recovery began in the fall 2022 school year. The amount of new off-campus student housing supply being added to the existing inventory has been trending downward since 2016. Despite some of the difficulties impacting student housing fundamentals during this past spring semester, we don’t believe there is much cause for concern for the fall 2024-2025 school year. Fundamentals are on pace to perform just slightly below last school year’s record-breaking performance. An additional silver lining for the student housing sector is that total undergraduate enrollment across all sectors is positive for the first time, meaning that some of the enrollment losses from the pandemic are being remedied. Going forward, we expect new supply to continue moderating as forecasted totals for the upcoming school year, as well as those in the pipeline for 2025, are at their lowest levels since the development boom in 2014.

MBA Newslink: JP Morgan recently revised Agency CMBS forecast down to $120 billion. What factors are driving the decrease in annual issuance volume forecast and what dynamics will need to shift to bring about higher volumes?

Chong Sin: The combination of a rapid rise in interest rates and slowing rent growth on the back of heightened construction deliveries has impeded multifamily acquisition activity for the better part of the last two years including those that back GSE loans. The good news, however, is that mortgage rates should stabilize and head lower into rate cuts and occupancies should bottom in the next couple of quarters given how much construction starts have collapsed in the last several quarters, setting the stage for better rent growth into 2H 2025.

Barring a significant recession, this is a recipe for acquisition capital to re-engage. In fact, institutional capital has already done that evidenced by some recent large portfolio acquisitions. We believe multifamily cap rates have topped out here at ~5.8% and falling mortgage rates will draw in more acquisition capital that can fuel growth in Agency CMBS issuance. While we have yet to finalize our 2025 issuance forecast, we expect next year’s volume to be higher.

MBA Newslink: Brian, what issues are in focus when considering the health of bank balance sheets?

Brian Bailey: There are some lender CRE challenges created by a normalizing rate environment, that continue to affect banks. The industry has experienced the issues of uncertain asset valuation, higher interest rates and a vast amount of loan maturities that are creating additional volatility. However, banks are much better capitalized and have taken significant positive steps to mitigate risk compared to the mid-2000s. While there will continue to be valuation and refinance issues, in part caused by the normalization of rates, banks are better capitalized and positioned to address these potential headwinds.