Arbor Report Finds Rental Housing Insulated from Economic Contraction, Risk Factors Endure
February 14, 2023 | Sarah Daniels | Rebusiness Online
Rental housing is uniquely positioned to withstand tremendous economic headwinds. Although some observers point to the slowdown in apartment rent growth as a sign of growing weakness, this trend is a cyclical feature that is not reflective of any structural change in the profile of demand or supply. It is normal to expect a period of slowing rent growth while there is uncertainty in the economic outlook. In-depth findings on these trends, plus a thorough economic outlook for 2023 and a complete breakdown of risk factors, are detailed in Arbor Realty Trust Special Report Spring 2023: Navigating a Corrective Environment, from which this article is excerpted.
While no asset class is immune from the challenges of higher interest rates, the presence of amortization, which spreads out a loan into a series of fixed payments over time, makes the multifamily sector less likely to see mounting distress. All Department of Housing and Urban Development (HUD)-conforming multifamily loans are fully amortizing. Moreover, Fannie Mae- and Freddie Mac-conforming multifamily loans require at least partial amortization. Where we are most likely to see debt-related difficulties in the next year and beyond are with CMBS transactions. According to data from Trepp and the Mortgage Bankers Association, a majority (64.6 percent) of outstanding CMBS loans are categorized as interest-only over their entire term. Operators with expiring interest-only loans may run into distress in the next year as they try to replace refinance debt at roughly twice the cost. The multifamily sector’s exposure to this market is limited, accounting for just 10.5 percent of outstanding CMBS debt. Meanwhile, the same cannot be said for the office, retail and hotel sectors — all of which rely more heavily on CMBS capital markets.
On the margins, subsets of mortgages in the multifamily portfolio will still require careful monitoring, especially those that were originated in the years leading up to the pandemic, when over-leveraging was a re-emergent concern.
