Multifamily’s Bounce Back Will Be Sharpest in These Markets

Article originally posted on Globe St. on March 4, 2024

It’s not quite “Don’t Worry, Be Happy,” but a new note from CBRE emphasizes that multifamily problems will eventually end. “Markets are never static and strong rent increases are likely to resume in traditionally higher growth cities as excess supply is absorbed,” they wrote.

Negative results in commercial real estate are nothing new. As with any market, it happens periodically and then improves. As pre-Socratic and misanthropic philosopher Heraclitus wrote, change is the only constant in life. When things are good, the saying rankles, but when they’re bad, it is a comfort.

The worry of multifamily negatives has been on the increase. In the minutes of the January Federal Open Markets Committee meeting, the Federal Reserve paired only this category with office as major causes of concern among bankers. Freddie Mac has seen a relative sharp escalation in serious multifamily delinquencies, although an at least decade-long high is still only 0.44%.

New York Community Bancorp, which set off concerns with recent losses, reported even higher-than-expected future losses on its commercial real estate loans last week.

JPMorgan Chase recently took a “deep dive” into its $120 billion multifamily loan portfolio and said that it didn’t have “any particularly large concerns about the multifamily portfolio,” which is different from saying no concerns. That concerns have been high, especially as the internal operations of banks can be opaque to many is probably why JPMorgan Chief Financial Officer Jeremy Barnum noted that even with multifamily representing $120 billion of JPMorgan’s $200 billion in commercial real estate loans, things were different from stressed apartments. “We underwrite to current rents, not future rents,” he said. “We don’t underwrite based on the hope or the expectation of market-rate conversions on the rent-controlled space.”

“The bounce back will likely be sharpest in Phoenix, Charlotte and Nashville,” CBRE wrote.

“Interestingly, higher rent expectations, paired with increased going-in yields, will likely bolster investment performance in these markets. But a market like Austin, where supply grew 6% in 2023 – three times the national average – will take longer to recover. Meanwhile, Cleveland, Milwaukee and similarly situated markets will see slightly slower rent growth but will continue to benefit from stable fundamentals and higher-than-normal barriers to homeownership.”