These Are the Riskiest Multifamily Securitization Markets

Multifamily market conditions have been increasingly difficult for a couple of years. KBRA looked at multifamily supply and demand in 25 of the largest MSAs in the country because of rising vacancy rates and record unit construction and developed a risk score for multifamily securitizations.

The MSAs represent $189.1 billion or two-thirds of the $287.8 billion of multifamily assets in Freddie Mac K-Series, commercial real estate collateralized loan obligation and conduit transactions. Each MSA gets a single average score on a 0 to 100 range. The higher the score, the weaker the securitizations in the MSA compared to the other MSAs.

The six weakest MSAs were Detroit, MI (86); Chicago, IL (79); Denver, CO (77); Washington, D.C. (74); Atlanta, GA (74); and Philadelphia, PA. The six strongest were Las Vegas, NV (30); San Diego, CA (48); Houston, TX (48); San Francisco, CA (52); Portland, OR (52); and Riverside, CA (52).

KBRA used Trepp data for performing and nonperforming multifamily loans in Freddie Mac K-Series floating and fixed rate five-, seven-, 10-, and 15-year deals, as well as CRE CLO and CMBS 2.0 conduit transactions. They also used fully extended maturity dates where there were extension options but excluded defeased loans. Of the total, 75% was Freddie Mac; 14.4%, CRE CLO; and 10.1% was conduit.

The factors included in a score were allocated balance of loans, the amount and percentage of loans maturing, vacancy rate and ranking, percent of current inventory under construction, estimated employment growth from 2023 to 2025, population growth over the same period, and the Federal Reserve Bank of Atlanta’s Home Ownership Affordability Monitor (HOAM) index.

Detroit, Chicago, and Denver all faced low employment growth. Detroit and Chicago also had negative population growth and a higher HOAM index. But the two also had lower vacancies and percentage of new units under construction compared to national averages. Denver’s high-risk score was mostly due to higher-than-average vacancy and percentage of inventory under construction.

On the top side, Los Vegas had strong current and forecast employment and population growth and a relatively strong HOMA score. Houston also had positive employment and population growth. San Diego had good vacancy and percentage of inventory under construction ratings.

“Austin, Phoenix, and Charlotte are notable among the top 25 list as they were the only three MSAs with double-digit vacancy rates and percentage of units under construction. However, their market scores benefited from healthy demand drivers.”

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