Multifamily Distress Is Starting, Depending on Where You Look

There’s been a question of whether multifamily would see some significant distress. A couple of years ago, Blackrock thought it would be a long way off. By early in 2023, Yardi thought multifamily distress was going to increase as buyers and sellers waited for the other to blink over prices. But even then, others thought there would be little multifamily distress this year.

According to a new report from Trepp, the resolution between the two takes might be a matter of location.

“The multifamily market has been flying under the radar given the distress prevalent in other sectors, but in certain regions, there have been some notable developments,” Trepp wrote. “Several major metropolitan areas in the country have exhibited distress or hints of it looming, as evidenced by their performance across a few key statistical indicators.”

Overall, multifamily delinquencies have been low. Of the top 25 MSAs, San Francisco’s rate of 2.69% has been the highest, following by New York (1.01%), Pittsburgh (0.82%), Philadelphia (0.70%), and Houston (0.62%).

The source of distress in San Francisco here, says Trepp, is “almost completely attributable to the Veritas Multifamily Portfolio,” accounting for $447 million in securitized CMBS debt, or 81% of the region’s entire delinquent balance.

However, where the picture gets more interesting is not in actual defaults, but where multifamily debt service coverage rate is less than 1. Lenders more typically look for at least 1.2, giving a 20% cushion. A DSCR of 1 means enough cash to service debt. Under 1, a property is in a case of an inability to catch-up and a likely need for better financing terms or a significant addition of capital.

“For multifamily properties, San Francisco leads again, with a rate of 12.98%,” Trepp writes. “Interestingly, three big Texas cities all rank in the top five, with Dallas, Houston, and San Antonio posting rates of 9.15%, 9.03%, and 7.59%, respectively.”

Those are some astounding numbers, where MSAs show a significant percentage of multifamily properties that one could say aren’t financially going concerns.

“With Houston’s lack of zoning regulation, it is always a tough area for multifamily relative to the more regulated DFW, Austin, and San Antonio metroplexes,” said Lonnie Hendry, senior vice president and head of CRE and advisory services at Trepp. “The metro is feeling the stress in the multifamily market, and though delinquency hasn’t reached concerning levels yet, both DSCR and occupancy are not very strong. As seen with the lodging and office industries in Houston, both are lagging, and Houston typically goes as the oil and gas market goes. This does not come as a complete surprise given the macro conditions, and Houston is more boom or bust on a relative basis.”