Loans that can't wait for a recovery are a broker opportunity, says First American's Xander Snyder
As market conditions have gotten more difficult in some parts of the country, apartment vacancies have climbed. While apartment owners in the Sun Belt region hope for market relief, their loans may not be able to wait.
The median vacancy rate in Sun Belt cities has nearly doubled over five years, reaching 10.7% in the second quarter, according to a First American analysis, with Fort Myers, Fla., at 18.6%.
Owners with multifamily loans coming due on those buildings have to refinance or sell in a market that has not recovered. That is where one economist sees work for commercial mortgage brokers, even in the messier deals.
Xander Snyder (pictured top), principal commercial real estate economist at First American, said the recovery owners are waiting for hasn't arrived, and the loans coming due won't wait for it.
"There's still a lot of debt coming due that either needs to be refinanced or replaced in a sale," Snyder told Mortgage Professional America. "Even if these are situations that aren't happy outcomes for the existing owners, I think they still represent opportunities for mortgage brokers who are comfortable with distressed situations.
“There are, of course, a number of properties that aren't in distress as well that also have debt coming due that needs to be managed even in the challenging operating environment."
‘A real pipeline opportunity’
Snyder said the Sun Belt may be at a turning point but is not in a recovery yet, and by recovery he means an operating one, with rents and occupancy back on the rise. Meanwhile, the loan deadlines keep arriving, and they represent deal possibilities for commercial brokers.
"A lot of these loans are either reaching hard maturities, meaning no extension options are left over, or reaching some sort of a liquidity date where the income profile of a property is going to change significantly," he said. "These are all problems that a competent mortgage broker can potentially solve or help someone solve. It's also a real pipeline opportunity."
Rent concessions remain common across the Sun Belt, where new Class A buildings have offered months of free rent, according to Snyder. Absorption is now exceeding new deliveries in several heavily supplied markets, an early sign of rebalancing.
"One of the big questions, and this is on a market-by-market basis, is the degree to which those moderate rent growth, modest rents or concessions are permanent or not," he said. "If they really are just a temporary cost of lease-up in order to get the latest supply overhang more occupied, then that's a temporary thing. And from a lender's perspective, those will materialize into more solid cash flows in the future."
South Central has the highest median city vacancy rate at 11.2%, followed by the Southeast at 10.8% and the Southwest at 10.2%. All three are above the 8.1% national median.
"Lots of vacancy that isn't filled can limit the size of a loan that you can take out, limit the size of your refinance and the refinance proceeds that you have," he said. "It can require an owner to contribute additional equity in order to pay down some of the existing loan, if vacancy is high enough where you're not covering your debt service or not covering it according to the covenants established in the loan."
Reading local markets
Vacancy varies widely even inside the same region, according to the First American analysis. In the Southeast, city vacancy rates range from 4.8% to 18.6%, while the Southwest runs from 5.3% to 11.3%.
"The best thing to do is just focus on a local market and don't expect that local market trends will necessarily mirror broader regional trends," Snyder said. "You can't assume one trend across those different places. You've got to focus on local deliveries, local absorptions, concessions in your particular submarket, and other impediments to lease-up."
Falling construction starts and steady household demand should gradually bring Sun Belt vacancy down, according to Snyder. Builders are also dealing with higher material costs.
"Higher vacancy rates at a market level make it more difficult to underwrite construction projects because there's more uncertainty about whatever rents that you're projecting," he said. "It's even more uncertain in markets with lots of new supply. A lot of places have stopped delivering a lot of new places just because construction of new apartments has fallen off a little bit."
Snyder expects elevated vacancy, softer rents and concessions to linger in the most heavily supplied markets, though he is upbeat about how long that will last.
"Typically, I don't think these are permanent affairs," he said. "I mean, we can always run into a recession, but I think demand in a lot of these markets will eventually catch back up to the near-term supply overhang. But it is a timing issue and how long owners have to wait for the softer rental markets to turn back around."
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