Texas' $500M in CMBS Multifamily Defaults Highest in US

DALLAS-Texas' past excesses have caught up with mortgage holders of vintage multifamily properties. The state's default rate is about $500 million or 30% of all multifamily delinquent loans in CMBS transactions, according to a just-released report.

Of the delinquent accounts, 16.7% are properties in Dallas/Fort Worth, says Peter Kozel, senior vice president with RealPoint, the research and surveillance division of GMAC Institutional Advisors LLC. The default glut breaks down to 42 properties in Dallas, 14 in Fort Worth, 19 in Houston, 16 in Austin and two in San Antonio. About 20% to 30% of the defaulted loans are REOs, according to Kozel.

"The actual number is probably larger than I have," Kozel tells GlobeSt.com. "This is a snapshot of what's in default." The research focused on delinquencies from 30 days in arrears to properties controlled by special servicers for a CMBS trust. The grand total doesn't include any workouts or special resolutions between property owners and servicers.

Kozel's research points to the 1970s and 1980s construction boom as the culprit. In 1983 alone, permits were issued for 171,000 multifamily units in Texas. In comparison, developers last year got permits to build 450,000 units from coast to coast and border to border. The research also shows properties in default average 25 years old. "It is fairly common to find multifamily collateral in CMBS transactions that comes from that age vintage," he concludes in his report. "But the particularly heavy representation of properties located in Texas is a function of past excesses in that state's residential housing industry."

Kozel says the good news is "it's a very narrow property sector that's causing these problems." And, he's not predicting roadblocks for borrowers as a result of the report. "I don't think it's going to get worse," he adds. "New supply is fairly well contained."

Kozel undertook the study after seeing a pattern develop in the past seven months. Other regions' multifamily sectors have improved, but "the Texas situation really hasn't changed that much," he says. "Texas has been fairly consistent over the last three or four years. It's been a market where they've had one of the highest delinquency rates."

And, Kozel adds, the troubled properties weren't necessarily ones with 100 units or less. Several defaults are in play for complexes with 300 to 400 apartments, he says.

With regard to the big picture, Kozel reports multifamily properties account for 24% of the collateral in CMBS transactions, but they equate to 32% of the delinquencies across all property types. Since August 2004, delinquent loans in all sectors have been just under $5 billion. In March 2005, it was $4.68 billion. "While the level of delinquent loans has remained roughly constant, the pool of outstanding CMBS continues to increase," Kozel concludes. "The overall delinquency rate is now just 1.02%."