By the Numbers

Persistent strength but challenges ahead in agency multifamily

| May 5, 2023

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Multifamily properties have not escaped the downdraft in commercial real estate. A star outperformer for over a decade, multifamily property prices have dropped 8% (CoStar) to 20% (Green Street) from recent peaks and are likely to deteriorate further before stabilizing towards the end of this year. The impact of rising rates and falling property prices on agency CMBS has been modest so far, in part thanks to a very long-dated maturity wall. Still, delinquency and default rates will probably rise over the next two years, adding to the overhang of Covid-era loans either still in forbearance or lingering in workout. Emerging trouble spots should be concentrated in floating-rate loans and seniors housing portfolios, while overall performance of the agency multifamily sector should continue to benefit from solid fundamentals.

Agency multifamily performance has been solid, despite the dramatic spike in mostly forbearance-driven delinquencies during the pandemic (Exhibit 1). Fannie Mae’s overall delinquencies hit a historic high of 1.37% of outstanding balances during the summer of 2020, but quickly retreated over the following 18 months as loans that entered forbearance gradually cured. The serious delinquency rate stood at 27 bp at the end of 2022, or $1.2 billion of unpaid principal balances (UPB), which was almost entirely comprised of loans delinquent 90 days or more.

Exhibit 1: Fannie Mae multifamily historical performance

Note: Fannie Mae categorizes multifamily loans in covid-related forbearance as being delinquent. This is consistent with the standard used in non-agency CMBS and by Ginnie Mae. Freddie Mac notes that the loans are modified and in forbearance, but categorizes them as performing or current unless they missed a required payment. This is a minor distinction in the data, but it does make it easier to track overall performance using Fannie’s data as opposed to Freddie’s. Data thru Q4 2022.
Source: Fannie Mae, Santander US Capital Markets

This delinquency rate remains high by historical standards, particularly compared to the pre-pandemic years when the average delinquency rate was about 8 bp. Based on Fannie Mae’s most recent forbearance disclosure report, 18 bp of the 27 bp of seriously delinquent loans are still in repayment from forbearance, so it’s likely that a good chunk of these loans will cure over time and become reperforming. Unfortunately, another pandemic-impacted portfolio of 150 seniors housing loans operated by Enlivant, recently announced that it was seeking to restructure its financing, and it appears headed to default. The loans were reportedly guaranteed variously by Fannie Mae and Freddie Mac, and do not appear to have been in the seriously delinquent category as of year-end 2022, so the overall delinquency rate will likely rise in the reports from the first and second quarters of 2023.

Exhibit 2: Fannie Mae multifamily credit losses declared over time

Note: Credit losses are only recorded at final disposition of the property. Data through Q4 2022.
Source: Fannie Mae, Santander US Capital Markets

Another issue complicating the recovery for agency multifamily, and seniors housing in particular, is that although 18 bp of current seriously delinquent loans are in forbearance repayment, 9 bp of loans are in workout, and most of those have been in workout for well over a year. The pace at which the GSEs tend to dispose of non-performing loans appears to have slowed considerably since the financial crisis (Exhibit 2). Despite having a build-up of non-performing loans, Fannie Mae has completed workout on very few loans since January of 2021, with exceptionally low credit losses recorded. As of year-end 2022, there were 74 loans, not in repayment for forbearance, that were in default. The bulk of these loans had been in workout for well over a year.

It’s unclear why the pace of defaulted loan resolutions appears to have slowed since the aftermath of the financial crisis, but it’s not particular to Fannie Mae. Although multifamily property prices have declined from their peaks, they have not experienced the deep year-over-year price drops of 20% like those during the financial crisis (Exhibit 3). On a year-over-year basis, multifamily prices just turned negative in the first quarter of 2023, notching a 0.8% drop according to CoStar data. Prices will probably continue to fall through much of 2023, perhaps reaching -10% to -15%, before stabilizing towards year-end.

Exhibit 3: Commercial real estate price appreciation

Note: Data through Q1 2023.
Source: CoStar

Despite the falling prices, this is unlikely to produce the pronounced market dislocations in multifamily like those from 2009 through 2011. One of the primary things that protects multifamily is that the maturity wall is rather extended compared to other property types (Exhibit 4). The historically low interest rates during the pandemic led to a refinancing wave across much of commercial real estate. Multifamily loans are heavily weighted towards 10-year maturities (Fannie, Freddie and most conduits) and 30- or 40-year finals (Ginnie Mae project loans). Securitized multifamily loans outstanding hit their largest maturity years in 2028-2032.

Exhibit 4: Commercial real estate maturity walls across property types

Note: Includes agency, non-agency and CRE CLO collateral.
Source: Bloomberg, Santander US Capital Markets

The securitized multifamily loans maturing over the next three years are also heavily concentrated in CRE CLOs, not in agency multifamily. Fannie Mae’s maturity wall, like that of Freddie and Ginnie, is even more gradual, with about 2% of collateral maturing in 2023 and 2024, and a gradual rise thereafter (Exhibit 5). This extended schedule takes pressure off the market and will likely result in fewer distressed sales at deeply discounted prices. Although price declines may reach -10% to -15% in multifamily indices over the next year, only a small fraction of multifamily investors will likely need to transact at those prices. This should help put a floor under multifamily prices and possibly result in a quick move towards stability.

Exhibit 5: Fannie Mae’s multifamily maturity wall

Source: Fannie Mae, Santander US Capital Markets

The challenges will clearly be concentrated in floating-rate loans and seniors housing. Seniors housing is still struggling with much lower occupancy rates and higher costs due to the pandemic, and the timeline for a recovery is unknown. Floating-rate borrowers have absorbed 500 bp of rate increases, and many will need to refinance into fixed-rate loans or find another exit strategy. Floating-rate multifamily loans are heavily concentrated in CRE CLOs and are held by banks, who have broad discretion to implement a variety of refinancing options and workout strategies. There is ample cash on the sidelines held by investors waiting to snap up distressed assets at low prices, which will also likely limit overall price declines in the multifamily universe.

Mary Beth Fisher, PhD
marybeth.fisher@santander.us
1 (646) 776-7872

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