The 5 markets with the most potential multifamily distress

Dive Insight:

Multifamily properties have received a lot of investment over the last few years. However, rising interest rates and slowing demand could make it difficult for many owners to refinance or pay the debt service on their apartment communities.
Although apartment owners across the country could be challenged, data and analytics firm Trepp pinpointed five metros that could be most susceptible to problems in a recent report. St. Louis came in as the market with the most potential for apartment distress, followed by San Francisco, Seattle, Chicago and Minneapolis.
For investors, these metros could provide buying opportunities, assuming the long-term fundamentals of the properties and the city make sense.

Dive Insight:

To identify potentially distressed markets, Trepp looked at multifamily properties within Freddie Mac pools. It focused on four metrics:

Trailing 12-month occupancy.
Percentage of apartment assets with a debt service coverage ratio (DSCR) of less than one time.
Approximate weighted average net cash flow (NCF) growth.
Percentage of originations that occurred in the first nine months of 2022 relative to all outstanding loans in a metro.

In pinpointing problem markets, Trepp gave insights into the challenges facing the top five cities:

St. Louis: St. Louis has the highest percentage of properties with a DSCR of less than one time among the top 50 metros in the country, according to Trepp. It also has one of the lowest occupancies in the country at 93%. The largest outstanding loan with a DSCR of less than one time is backing a senior living facility, The Gatesworth at One McKnight Place.
San Francisco: As tech layoffs increase, rental housing fundamentals in the Bay Area face challenges. Approximately 43% of multifamily properties in San Francisco have seen NCF decline by 5% or more. In addition, roughly 9% of properties in the metro have a DSCR less than one time, which was the second highest percentage of the 50 largest MSAs.
Seattle: Seattle, also getting hit hard by the tech layoffs, has a downtown that has lagged other markets in the COVID rental rebound. Approximately 29% of properties posted a year-over-year decline in NCF of 5% or more. The commercial mortgage-backed securities loan backing the 131-unit Rivet Apartments in South Lake Union, near Amazon’s headquarters, was the largest loan with a DSCR of less than one time.
Chicago: The Windy City is seeing an exodus of both people and corporations, like Citadel (moving to Miami) and Boeing (moving to Arlington, Virginia). More than 5% of apartment loans in the metro had a DSCR of less than one time — ranking sixth in the country. In addition, approximately 25% of the city’s properties posted a YOY decrease in NCF of more than 5%.
Minneapolis: With Target, one of the city’s largest employers, allowing hybrid work, rental properties in Minneapolis have struggled, according to Trepp. Roughly 3% of loans in the metro had a DSCR of less than one time, while it had the third lowest occupancy level among the 50 largest cities at about 93%. Around 22% of properties posted a YOY decrease in NCF of more than 5%.