Monday Morning Scoop - Small Apartment Cap Rates Jump As Sector Remains ResilientMonday Morning Scoop -

Small Apartment Cap Rates Jump As Sector Remains Resilient

There’s been much talk about the delinquency rates for multifamily properties during this period of heightened interest rates. 

According to Trepp, the delinquency rate of multifamily loans in CMBS transactions stands at 1.6% through June, which is the best mark of any commercial property type other than industrial. 

This pace is similar for small asset classes, according to the Arbor Small Apartment Investor Trends Report Q3 2023.

Through the first half of 2023, “capital market realities continued testing the resiliency of the small multifamily subsector,” Arbor said.

If all things remain equal, “negative pricing pressures are unlikely to abate through the second half of the year,” Arbor reported. “Still, small multifamily, strengthened by its healthy property-level cash flows, remains well-equipped to overcome macroeconomic headwinds [into 2024].”

There’s been a widespread, rapid recalibration of risk and pricing of small multifamily assets. But amid a corrective environment, the operational profile of the small multifamily subsector has held strong, Arbor reported.

Rent collection is trending higher and expense ratios normalizing. 

The $83.9 billion year-end 2022 estimate of new multifamily lending volume on loans with original balances between $1 million and $7.5 million — including loans for apartment building sales and refinancing — represented a modest 10.9% deceleration from 2021’s record high of $94.1 billion.

In terms of lending volume, there are signs of movement, based on the annualized 2023 total. Its current estimate of $20.8 billion represents the slowest pace since 2010, but Q2’s performance was a solid improvement on Q1’s $15.5 billion. 

Small multifamily cap rates experienced their largest single-period jump since 2009 when they increased by 33 bps between the first and second quarters of this year.

Like all commercial real estate asset classes, Arbor said, the small multifamily market will continue to be challenged over the next several months. 

“While the Federal Reserve signaled it is near the end of its monetary tightening cycle, interest rate normalization is likely to take time,” according to the report.

By: Richard Berger
Source: GlobeStreet