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Multifamily Follows Housing With A Lag: Find Out When It Ends
September 23, 2009 by Neil · 3 Comments
Commercial real estate prices long continued to rise, even after housing prices started to drop as early as 2006. Now, commercial properties in all asset classes continue to get beaten like the Washington Generals at a Harlem Globetrotters game.
I have long said that multifamily trends lag behind housing by about a year and a half to two years. The S&P Case Shiller 20 city composite index indicates that housing values peaked in mid 2006, while Moody’s/REAL index indicates that commercial property values peaked nationally in October 2007, with a lag of 16 months.
Not helping commercial real estate prices? Banks continue to tighten lending practices.
According to the July 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices, nearly all banks indicated that current lending standards in commercial real estate were tighter than longer-term average levels. 40 percent expected standards to return to longer-term average levels by H2 2010 or in 2011 for both investment-grade and non-investment-grade lending, while 40 percent indicated that standards would remain tighter than their longer-term average levels for the foreseeable future.
What few loans are being made need to be repackaged and resold as CMBS. In recent years, the CMBS market has satisfied about 40% of the credit needs of the commercial mortgage sector. If this market is closed, then the refinancing of maturing mortgages will be exceedingly difficult and this will exacerbate the drop in commercial real estate prices, loan defaults and the pressure on bank capital. (Report: A Preliminary Assessment of the TALF; June 4, 2009) (Hat Tip: RGE Monitor)
When will prices stop falling? One research company expects commercial mortgage defaults to reach 5.4% in 2011 before dropping. If more commercial property owners continue defaulting, buyers with access to banks’ pipelines of such deals will bid based more on numbers than geography.
Why are multifamily and commercial defaults mirroring residential defaults? It’s not magnets or voodoo. The same deeply flawed underwriting that plagued residential lending also infected commercial underwriting as well.
Also not helping matters? Vacancy rates have risen across the board, and are almost kissing 8%, the highest in almost a quarter of a century. Such a glut is causing owners to slash rental prices across the board, and make concessions unseen in recent memory, like paying finder fees to brokers, free rent, and outright gifts.
So when will apartment building prices rise again? According to a recent analysis from Wells Fargo Securities, “The demand for apartments tends to improve about one year after employment troughs,” indicating that a price rebound won’t occur until about 2011– around the same time that commercial mortgage defaults will reach their apex.
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Check out what others are saying about this post...[...] While anecdotal evidence indicates some investors are spending their money on some deals, deal volume still remains at a fraction of what it once was. As of July, commercial property values are down 30.8% y/y and nearly 39% below the peak in October 2… [...]
[...] 21, 2009 by Neil · Leave a Comment Multifamily Investor has theorized that 2011 will be the year that multifamily prices hit bottom. Most estimates for commercial mortgage defaults hitting their peak of about 5 1/2% are pegged for [...]
[...] become due. (2011 will be the peak year for residential mortgage resets. Commercial real estate lags behind residential real estate trends by about 12-18 months.) If commercial property owners start throwing their keys to uncooperative lenders en masse, and [...]