Published on Wednesday, February 21, 2024

Loans on past-due or non-accruing status are still below long-term averages.


First, in the words of Douglas Adams and his The Hitchhiker’s Guide to the Galaxy, “Don’t panic.”

It’s not a case of the sky is falling. It’s not a matter of all multifamily properties plunging toward the ground like a meteorite burning hot and fast before embedding itself into the earth. And, overall, things are pretty good.

But there are problems brewing in certain areas of multifamily, according to Fitch Ratings, because of the relatively high price of refinancing loans.

The types of properties facing potential problems “include those that are rent stabilized, reliant on overly optimistic rental income increase projections, or in submarkets with elevated rental vacancy rates and/or excess supply, many of which are in Sunbelt states, particularly Texas, Florida, Tennessee and the Carolinas.”

These properties, for various reasons, face danger if needing to refinance because they face limitations on the ability to pay the debt service. Rent stabilized means limited upside over time for NOI because the property has already hit its ongoing revenue. Overly optimistic rent income increase projections means the entire project’s financial plan counts on unrealistic increases over time. The submarkets with growing excess supply face inadequate demand to absorb it, with falling prices being likely.

The good news is that “the level of multifamily loans past due or on non-accruing status are still below long-term averages, and well below peak levels during the Global Financial Crisis for US banks,” Fitch wrote.

US bank lending for multifamily has grown 32% since pre-pandemic times. The lending is highly concentrated; the 10 largest lenders hold almost 40% of all outstanding multifamily loans with banks.

Where the pain could fall is to smaller banks. “There were 49 banks as of YE 2023 with multifamily nonperforming loans (NPLs) greater than 5% of total multifamily loans,” they wrote. The banks, averaging $1.3 billion in total assets, are relatively small and the total of multifamily loans they hold “is only a modest fraction of the overall industry,” so “limiting the contagion to the broader financial system if one or more of these banks were to fail.”

It took almost two years to reach a peak in losses after the delinquency peak, so chances are that deterioration would take an extended period of time to flourish, “and problem loans have yet to peak for the sector.”