One of the most underappreciated commercial real estate trends in banking is the remarkable stability of multifamily rents during this pandemic. As of last week, according to the National Multifamily Housing Council (NMHC), 77.4% of renters in an 11.4 million sample size of professionally managed apartment complexes were making their rent payment which compares to 79.7% during the same time as last year and an average of about 82% for the year (summer delinquencies are usually higher).
Government-sponsored enterprises (GSEs) have been lending to borrowers for many decades. The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) have popular multifamily lending programs so much so that they now control the bulk of the market. For example, Freddie Mac’s total multifamily finance activity for 2018 was $77.5B, and Fannie Mae’s was $65.4B which means that if you have to compete, your bank needs to do so carefully as you have a high probability of getting adversely selected.
Multifamily lending has been doing exceedingly well lately. A growing economy combined with a shortage of housing in many areas has created an increase in rents and a decrease in vacancies in most markets. The probability of default, as of April, is a mere 11 basis points. Despite the loss given default being up due to the higher loan-to-value (LTV) levels, the projected expected loss is still near a record low. In this article, we discuss pricing, return, a new potential risk in the market plus we highlight a great opportunity for banks.