May 15, 2017 / 3:44 PM / 8 months ago

Fitch: Risks Emerging in Some US MultiFamily Property Markets

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: U.S. Banks: Multifamily Lending (A Long and Strong Cycle of Growth) here NEW YORK, May 15 (Fitch) Growth in US multifamily lending is showing signs of a plateau after a long and robust period of expansion since the global financial crisis, says Fitch Ratings. Vacancy rates should normalize and asset quality mean reversion for bank lending is also likely as the apartment market reaches unit supply/demand equilibrium. The severity in vacancy rate fluctuations will vary depending on property type and market. Luxury/Class A properties could be at greater risk, owing to the surge in supply relative to Class B/C properties. Cities with historically less volatility in vacancy rates in non-luxury multifamily housing, including New York and Los Angeles, should perform better. Vacancy rates in these cities are lower than the national average due to rent stabilization measures which have limited volatility through economic cycles. In contrast, metropolitan statistical areas (MSAs) in the South and Midwest with historically higher vacancy rate cyclicality and without rent regulations should see greater volatility. Banks with greater exposures to Class B/C properties in stable markets should outperform from a credit standpoint. Credit performance in multifamily portfolios may be more variable for banks with less specialization and/or exposures in a relatively less stable market, although these institutions tend to be less concentrated. High regional concentrations in multifamily mortgages act as a constraint to credit profiles, especially in areas with higher vacancy rate volatility. That said, the majority of concentrated banks tend to operate in relatively more stable markets like New York and Southern California. Concentrated multifamily lenders in Fitch's rated universe specialize in rent-stabilized apartments in New York City. Fitch anticipates these institutions will continue to exhibit strong credit performance, provided they maintain underwriting focus on these types of properties. Tighter underwriting standards for single-family home mortgages, changing consumer preference for apartments and demographic factors have contributed to the long-term boom in the multifamily market. Fundamentals remain stable even as property valuations have been pushed above the previous peak in 2007 and with capitalization rates now at long-term lows. However, there are signs of oversupply emerging in some MSAs and there could be further risks should demand soften. Effective rents in New York City at year-end 2016 fell modestly relative to the previous year, which was the first year-on-year decline since 2009. Moreover, vacancies are expected to increase this year. Vacancies were already up in Houston in 2016, and Fitch expects supply pressures in many other MSAs in 2017 including Seattle, Denver, Washington D.C., San Francisco, San Jose and Orlando. Banks have a prominent role in multifamily lending, accounting for 36% of outstanding multifamily mortgage debt as of 3Q16. In recent years, multifamily lending has been among the fastest growing segments for the US banking system. The compound annual growth rate for outstanding multifamily mortgages was 14% for the three-year period to 2016, far outstripping aggregate loan growth for the banking system. Multifamily mortgage origination activity remains robust, although it declined slightly in 2016. Fitch believes this reflects growing caution toward the asset class. Multifamily lending has been characterized by strong credit performance that has outperformed other bank lending segments over the past 20 years. However, rapid multifamily loan growth in recent years has been a driver of strong competition among US banks. This latest increase could elevate credit risks at some institutions, in light of current market fundamentals, should it have resulted in lower underwriting standards. For Fitch's analysis of US multifamily market trends and our views on bank credit implications, refer to the special report titled "U.S. Banks: Multifamily Lending," published today. Contact: Johannes Moller, CFA Associate Director Financial Institutions + 1 646 582-4954 Fitch Ratings 33 Whitehall Street New York, NY Justin Patrie, CFA Senior Analyst Fitch Wire +1 646 582-4964 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. 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