Multifamily Plays Increasingly Prominent Role in Composition of CMBS

Multifamily properties make up the third largest property type in commercial mortgage-backed securities deals by loan balance, according to a report from Moody's Investors Service.

Multifamily loans constituted about 22% of the collateral securing CMBS during 2002, the rating agency reports, after retail (40.5%) and office (23.6%) loans.

Moody's regards multifamily housing to be less riskier than most other property types because it has one of the lowest default rates of the major property types.

Stewart Rubin, a Moody's analyst, notes, "Fundamentally, multifamily is less risky than other asset types for several reasons: there is generally less cash flow volatility, they have lower operating expense ratios, they are less capital- intensive than other property types, and refinance possibilities include Fannie Mae."

On the negative side of the equation, multifamily properties have short-term leases.

However, this factor is "mitigated by the reality of high residential lease renewal rates," Mr. Rubin said.

Major influences on multifamily demand are job growth and household formation.

And in the current economic climate, Mr. Rubin said, "The apartment property sector is threatened by the booming market in single-family home sales spurred by low interest rates, weak demand resulting from a struggling economy and job losses, and overbuilding."

Over a period of years however, multifamily has performed well, going by a Moody's scoring system that includes data for all years since 1982.

The multifamily composite score for the period is 77, compared to 48 for office, 66 for industrial and 70 for community retail, the rating agency reports. In rating multifamily properties, the rating agency considers location to the key factor.

"Large metropolitan markets, inner-ring suburbs, and edge cities, which are supply-constrained and have high barriers to entry" are regarded as prime locations by Moody's.

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