Cracks Emerge in Multifamily Sector Under COVID-19 Pressure

A recent analysis by a pair of Moody’s experts highlights what could be the first sign of pandemic-induced stress on the multifamily sector. While the sector continues to hold up better than retail and lodging, the uptick in delinquency for this group is raising concern.

That’s the take on the multifamily landscape in the note titled: “CMBS Newsflash: Emerging Cracks in Multifamily and a CDC Eviction Moratorium” written by David Salz and Thomas P LaSalvia. The analysis dives into the trend of increasing volume of special servicing within the sector as overall delinquency rates have stabilized and even show signs of declining, and why.

The report for Real Estate Solutions for Moody’s Analytics REIS focuses on Commercial Mortgage-Backed Securities (CMBS), a type of mortgage-backed security backed by commercial and multifamily mortgages rather than residential real estate that tend to be more complex and volatile.

Salz leads the Moody’s Analytics CMBS desk within the Structured Content Solutions group, while LaSalvia is a Senior Economist in the Research and Economics Department at Moody’s Analytics REIS.

“In our review of August’s remittances, we’ve noticed some conflicting data, in addition to a multifamily sector displaying its first sign of pandemic related stress,” the two researchers wrote. “While the overall delinquency rate is fairly stable and even showing signs of decline, the volume of special servicing remains stubbornly high and is inching higher.”

Their conclusion: The multifamily numbers should be a cause for concern for what up to this point has been what the authors described as “the darling of the commercial real estate industry.

“In certain cuts of the data, we even see sector-specific conflict in terms where stress is hiding and likely to show up in the near future,” wrote Salz and LaSalvia.

The REIS report compared month-over-month data, focusing on a population that includes loans whose servicer comments contained, among reasons for delinquency, “COVID-19” but were not inclined to “cancel” relief.

Through July and August, loan and balance counts within this population were relatively steady across sectors, based on the data, but the payment status of borrowers with “COVID-19” concerns were escalating.

In July, the report found that a large proportion of “concerned” borrowers were current in the multifamily, office, and industrial sectors. However, the percentage of loans paying on time for multifamily (both agency and non-agency multifamily) decreased in August, just a month later.

“Is this the beginning of growing stress for a sector many consider the darling of CRE?” Salz and LaSalvia ask. “Overall, we expect multifamily to continue to hold up better than retail and lodging, but the uptick in delinquency for this group must be watched. Further, the evidence of some stress does coincide with a multitude of other issues in multifamily.”

Among these ”other issues” likely contributing to the trend includes the expiration of the CARES Act [the Coronavirus Aid, Relief, and Economic Security Act - a $2.2 trillion economic stimulus bill passed by Congress earlier this year and signed into law by President Donald Trump on March 27, 2020 in response to the economic fallout of the COVID-19 pandemic], recently stalled relief packages in Congress over the next stimulus check- if any; and not the least, another half a million people becoming “permanently” unemployed.

Not surprisingly, coinciding with such factors was further decline in on-time tenant rent payments in August, while data collected by Moody’s Analytics REIS through July and August showed asking and effective rent declines for the multifamily sector.

“Moreover, the recent Centers for Disease Control eviction moratorium could spell trouble for landlords and borrowers with thin margins,” said Salz and LaSalvia, referring to the Sept. 2 moratorium signed by CDC Director Dr. Robert Redfield declaring evictions of tenants could be detrimental to public health control measures aimed at slowing the spread of COVID-19.

“There has been some movement in CMBS relief from Congress, but nothing is concrete or imminent. Consequently, the pressure could move towards special servicers, who are already burdened with a multitude of requests from the lodging and retail sectors,” added the authors.

Month over month, the Moody’s report showed only improvement in the lodging sector.