Multifamily Loan Performance and Outlook

Multifamily has long been a favored commercial real estate property type for its durable cash flows and broad investor base. This proved especially true after the onset of the Coronavirus Disease (COVID-19) pandemic in 2020 through early 2023, when DBRS Morningstar saw a short window of time where the property type had especially strong fundamentals and a very accommodating cost of capital from historically low interest rates. Investors flooded the market during this time, driving record transaction volumes and impressive value appreciation. The frenzy ended up being short lived and contributed to the broader economy’s overheating and excessive inflation, pushing the consumer price index to increase by 9.1% in June 2022. To combat runaway inflation, the Fed stepped in with an aggressive rate hiking program, pushing interest rates from near 0% to 5.5%. This immediately changed multifamily investors’ yield calculations and raised capitalization rates, resulting in lower values.

Despite the headwinds facing the broader economy and the multifamily sector, DBRS Morningstar expects the sector to weather the storm better than most other asset classes and maintain a stable outlook. Coinciding with the rate-hike schedule, multifamily market fundamentals started showing cracks as evidenced by cooling rent growth, higher vacancy, new supply, larger concession packages, and elevated bad debt. The macroeconomic outlook for the next several quarters is opaque, with the potential for a recession. Specific to multifamily properties and loans, DBRS Morningstar expects that the multifamily delinquency rate, which has risen 50 basis points since June 2022, will continue to increase from the relatively low delinquency rate of 1.45% as of July 2023.