NEW YORK CITY—Multifamily has captured a greater share of newCMBS issuance this year, with conduits backed byapartment properties accounting for 17% of originations in thefirst quarter, compared to 7% the year prior. However, a reportfrom Standard & Poor's raises the question ofwhether new issuance has come late to the party, although thesector's fundamentals are still strong.

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“Although we believe the outlook for property fundamentals overthe next few years is still good, supply growth and increased homesales activity have started to slow things down in the multifamilysector,” write senior credit analyst Larry Kay and his co-authorsat S&P. Citing the results from the most recentNational Multifamily Housing Council quarterlysurvey of senior executives in the industry, they write that“apartment market conditions have been weakening. A markettightness index below 50 indicates that marketconditions--including vacancies and rent increases--are softening,while a sales volume index below 50 signifies that property salesare slowing. Even though apartment activity is typically slow inNovember through January, the last time either of these two indicesindicated improving conditions was in July 2013.”

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Further, Kay notes that although the amount of multifamily CMBSdelinquency declined once more in the first quarter, “it declinedthe least of the property types. Multifamily also had the sharpestproperty loss severity rate increase in the quarter, jumping to34.1% from 9.4%” in Q4 2013. That being said, the report notes thatlate-pays in multifamily have shown the steepest decline of anysector since peaking in 2010.

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According to CBRE, C&P notes, multifamily vacancy in Q1increased 10 basis points to 4.9%, while rent increases havedeclined for two consecutive years. “Although we believe theoutlook for property fundamentals over the next few years is stillgood, supply growth and increased home sales activity have startedto slow things down in the multifamily sector. And as with creditperformance, it appears that multifamily property fundamentals haveseen their best days.”

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In the wake of the Great Recession, multifamily completionsdropped to historical lows, and then began climbing again lastyear. “With increasing supply, class A apartments could feel thebrunt of the competition pressuring this segment's rents,” thereport states. “If rents in this segment soften, CMBS multifamilycollateral (typically characterized by class B and C apartments)could be affected by renters trading up to these class Aapartments, leaving its apartments with higher vacancies.”

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Although multifamily credit performance could be showing signsof encroaching age, “issuance levels are taking on a new life,” thereport states. “In 2009, Freddie Mac introducedits multifamily K-series securitization program. Its entrance intosecuritization didn't have much effect on the CMBS market in 2009and 2010, when it was virtually nonexistent."

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In 2011 and 2012, however, "even as CMBS new issuance began torecover, Freddie Mac's competitive presence kept CMBS multifamilyvolume low," according to S&P. "Over the last year, CMBSmultifamily issuance activity has increased,” while Freddie'sorigination volume has fallen during the same time period.

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Paul Bubny

Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.