The stress of higher interest rates, combined with inflationary pressures and rising tenant delinquency, has contributed to an increase in apartment owners falling behind on mortgage payments. Trepp recently issued a report that showed CMBS delinquency rates of 3.8% for multifamily, 6.4% for retail and 8.2% for office. Multifamily is faring much better than office and retail because demand is still strong for housing while office and retail face structural challenges. Also, many apartment owners have fixed financing and lower leverage so are not as exposed to declines in net operating income.
The above statistics are averages and as always, the “devil is in the details.” When Trepp parsed the multifamily mortgage delinquency by loan size, the numbers were quite different. The highest level of problem mortgages (5.3%) is attributed to smaller properties with loans of less than $2M. The largest deals, with loans greater than $30M, are doing better with only 2.8% late on payments. The best performing multifamily loans are between $14M and $30M, and the rate of delinquency is just over 1%.
It makes sense that smaller properties are struggling the most because, generally, these deals are undercapitalized and, in some cases, don’t have professional management. Larger properties tend to be newer builds, purchased at lower cap rates, and face increased competition from new construction. The mid-sized properties performing the best (where CREE invests) are generally well capitalized and have professional property management in place.
Signs of stress are showing across the US economy, led by weakening labor trends and failing businesses. Through the first half of 2024, 480K companies filed for bankruptcy, which is up 16% year-over-year. The good news is that inflation continues to fall, and it appears that the FED may provide some relief through lower interest rates. In the meantime, we are working hard on getting the economic occupancy levels higher across our properties to increase NOI and, ultimately, distributions.
