April 2nd, 2020 – Multifamily Market News

Watched another great, informative and inspiring Walker & Dunlop live webcast yesterday morning, find the video by clicking here. The video featured author Nancy Koehn, link to her book here, Forged In Crisis. She quoted a few leaders in history that thrived and grew throughout and after a crisis, like the Civil War, Great Depression, etc. This plus further insight on the commercial real estate market and the pandemic in the video.

Here’s an interesting Forbes article about negative interest rates, find it here. Here are a few key excerpts below: 

  • “Interest rates on short-term Treasury bills turned negative on March 25, 2020. While the rates have inched back up into the positive territory since then, they still hover around zero.”
  • “The negative rate essentially means that borrowers get paid to borrow money from the lender. When the Treasury bill rates turn negative, investors such as banks and mutual funds pay to the U.S. government, the borrower in this case, for taking their money.”
  • “Why does this happen in the first place? At a time of crisis, such as wars and pandemics, risk-aversion skyrockets, and investors run for ultra-safe and ultra-liquid assets. Short-term Treasury bills are perfect instruments for such needs: extremely safe and almost cash-like. “
  • “Increased investor demand pushes up the price of short-term Treasury bills, and as their prices go up, the effective interest rates (yield) of Treasury bills come down, even becoming negative in extreme cases.”
  • “The Fed’s action to stimulate the economy by lowering the Federal Funds rate can, in fact, exacerbate this problem. When central banks lower the policy rate (i.e., the Fed funds rate), interest rates across the board come down.”
  • “The negative rate makes it attractive to be a borrower, and in such environment the opportunity cost of hoarding cash is also low. With the combined effect of these two forces, some firms may find it worthwhile to borrow to build their cash balance. Cash balance becomes extremely important when a company faces a significant probability of bankruptcy.”
  • “A subtle but significant effect of zero-to-negative interest rate policy comes through the banking sector. In this environment, banks face asymmetrical effects of rate cuts across their assets and liability side. On the asset side, as expected, the borrowers demand and get lower interest rates. But on the liability side, it is extremely hard, if not impossible, for a bank to pass on negative interest rates to their retail depositors.”

CRE Loan Defaults Soar Under Trepp Stress Test – find link here

  • “To gauge the impact of the COVID-19 disruption, Trepp has applied an economic and real estate forecast scenario to a portfolio of 12,500 commercial real estate loans.”
  • “Under the scenario Trepp used, the cumulative default rate across commercial mortgages overall will rise to 8%, up significantly from the current 0.4% default rate. The impact will be most immediate and severe in the lodging sector, with a cumulative default rate approaching 35%. The retail sector will also experience elevated defaults, with an estimated cumulative default rate of 16% in the scenario. Other major real estate sectors analyzed, such as office, multifamily, and industrial, will experience more measured increases in distress.”
  • “This scenario assumes that GDP falls precipitously, the unemployment rate rises (peaking at 10%), interest rates plunge, and asset prices fall. Commercial real estate prices fall 35% over the first two years of the scenario.”
  • “Trepp applied this scenario to a portfolio of 12,500 commercial real estate balance sheet loans held by commercial banks that have an aggregate outstanding balance of $77.5 billion. ”
    • “Industrial and multifamily mortgages will experience smaller increases in default rates, peaking at about 0.5%. For both property types, the expected declines in prices and NOI mean that LTV and DSCR ratios will hold up better, compared to lodging and retail.”
  • “The other sectors analyzed, including office, multifamily and industrial, will fare comparatively better, with cumulative default rates in the 3% to 4.3% range and cumulative losses in the 0.8% to 1.2% range.”

San Diego is a Top Market for Overleveraged Mortgage Debt – see link here.

  • “According to a new report from Wallet Hub, the city ranks in the top 11% percent, with an average home overleveraged score in the 89th percentile. “
  • “This is because the median house value in the city is very high, at almost $600,000, while the median income is only about $55,000. This makes housing affordability a serious issue. However, people want to own a home, and they end up taking mortgages that can put strains on their household budgets.”
  • “The report shows the median mortgage balance at $332,267 and median debt-to-income ratio at 605%. The median home price is $574,900 while the median income is $54,875.”
  • “the health crisis will definitely have an impact on the real estate market. Given that a large number of people have become unemployed, evictions and foreclosures could boom after the crisis passes”
  • “San Diego isn’t the only market facing high overleverage. The problem is prevalent throughout California, where incomes are regularly far lower than median home prices. “San Diego is among several other cities in California that are facing the same problems—small median incomes and expensive homes,” says Gonzalez. “In fact, this seems to be a common occurrence throughout the state. Anaheim, Long Beach, Santa Clarita and Garden Grove are just a few of the other markets experiencing the same situation.”



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