Saturday, January 23, 2021

Losing lure of city living hurts US mortgage bonds

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U.S. cities are losing their appeal to tenants, placing the first signs of tension in the $ 1.2 billion mortgage-backed bond market on apartment buildings.

The coronavirus pandemic continues to spread among the world’s population, and working from home remains the norm in many professions, prompting some townspeople to pack their bags and leave. Data company Trepp has identified 50 so-called multi-family loans with a balance of $ 1.5 billion, where building occupancy rates fell 15 percentage points last year.

Investors in commercial mortgage-backed securities, where loans backed by properties like apartment buildings are pooled to support the sale of new debt, are watching closely.

“Is this the tip of the iceberg?” said Manus Clancy, head of research at Trepp. “We believe the number of loans struggling with low occupancy needs to increase.”

Trepp data highlights risks in the commercial mortgage market. Despite investor exuberance fueled by the prospect of a widely administered vaccine helping to drive up CMBS prices, it may still be some time before people return to working in office buildings in major cities. cities where rents are high.

“In large urban cities, we are seeing a decrease in occupancy rates,” said Mr. Clancy. “It is expensive to live in these places and at the moment you cannot do anything with the available equipment and you do not go to the office. These were often the reasons people stayed in their apartments. It is not surprising that these things are decreasing. “

The occupancy rate at the NEMA luxury apartment building in San Francisco that sits across from Twitter’s headquarters has dropped to 70% in 2020. The $ 200 million loan behind it, supporting a CMBS in a single asset forged in 2019, has regained value from the darkest point. due to the pandemic on world markets. But it remains well below pre-pandemic levels. The triple-B rated tranche of the transaction is priced at 95 cents to the dollar, having traded at a premium of over 115 cents to the dollar in early 2020.

In New York, the 75-unit Chelsea29 building on 29th Street, with a rooftop terrace and a fitness center, saw its occupancy rate drop to 75%. It represents just 2% of a 2019 $ 1.3 billion CMBS deal that is trading around 90 cents on the dollar, after gaining ground since March.

The drop in occupancy rate being tracked by Trepp affects only 4% of loans whose figures were released at the end of 2020. Analysts and investors have been expecting rent payments to drop for some time, given the decline in fiscal stimulus support.

But with the tension come the first signs that the remaining tenants are also starting to struggle to pay their rent. New York Fed analysts warned of a “eviction cliff” in a white paper last month. The pandemic and related job losses “have limited the ability of residential and commercial tenants to pay monthly expenses and the ability of landlords to keep abreast of mortgages,” wrote authors Marisa Casellas-Barnes and Jessica Battisto.

The National Association of Multifamily Housing found that just over 75% of households had paid full or partial rent for the month to December 6, down almost 8 percentage points from the same point in the year former. This is the largest year-over-year decline since the onset of the coronavirus. The month ended with just under 94% of tenants paying their rent.

“An increasing number of households are struggling to make ends meet,” said Doug Bibby, president of the NMHC. “As the nation enters a winter with rising rates of Covid-19 cases and even greater economic distress. . . it is only a matter of time before tenants and housing providers reach the end of their resources. “

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