We are a society of extremes: First, last. Best, worst. Largest, smallest. In finance — and financial journalism — it’s easy to cling to them. Who isn’t a sap for a story about the tallest building or the largest deal.
But numbers that may seem like the best, or the worst, don’t always tell the full story.
Look at the often cited and talked about US CMBS delinquency rates. January’s payoff of the $3 billion loan tied to Manhattan’s Stuyvesant Town-Peter Cooper Village loan sent Trepp’s multifamily CMBS delinquency rate plunging 597 basis points from 8.28 to 2.31 percent.
For years the multifamily rate was berated as the “worst” performer, holding the highest delinquency rate among the main property types from October 2010 to March 2013, and then again from October 2013 until December 2015. Then, in January, it was suddenly the “best.”
But despite the massive rate decline, the quality of multifamily CMBS didn’t change all that much during this transformation from “worst” to “best.”
It wasn’t a reflection of the overall health of the asset class, its fundamentals or the quality of its loans. Rather, the rate swing pointed more to the “lumpiness of the asset class and the ability of special servicers to finally shave off some dead weight,” Trepp senior managing director Manus Clancy told me.
“They are getting rid of the toxic waste that’s in there and it’s indicative that the market is ripe to sell these things,” he says. “But it’s kind of like in basketball: if you got rid of the [New York] Knicks or the [Brooklyn] Nets, the overall play may improve, but that doesn’t mean the top 10 teams are getting any better.”
So until its payoff, the Stuy Town loan (and a few other sizeable but not nearly as large REO loans) had lingered like a giant, hopeless basketball team, skewing the multifamily delinquency rate into the embarrassing 8 percents.
“It was making multifamily appear much worse than it would have otherwise,” Clancy says. “CMBS guys knew that, but some bankers or insurance professionals might have looked at that and mistakenly thought that multifamily was making bad loans in general.”
Fitch Ratings noted in a recent newsletter that January’s overall delinquency rate drop was the largest month-over-month decline since the index was launched 15 years ago. But there was no change in Fitch’s outlook for the multifamily market — it remained ‘stable’ — nor did the wild jump correlate with underlying fundamentals.
There have been only “slight bumps” in multifamily vacancies and rent growth is forecasted to hit 4.2 percent in 2016 before slowing to 3.6 percent in 2017, Fitch noted. The concerns that existed before the big payoff persist.
“Overbuilding could signal peaking values” says Mary McNeil, a Fitch managing director. Markets focused on the oil industry also represent pockets of concern, and Fitch has a close eye on older student housing as newer projects lure students, she adds.
Stuy Town could soon be sitting pretty after its sale to Blackstone and Ivanhoe Cambridge for $5.3 billion, with its ‘toxic waste’ swapped out for a brand new $2.7 billion agency loan.
The sale was welcomed by many New Yorkers, particularly those who hope its new owners can breathe new life into a controversial residential development that’s long been mired by financial setbacks. Tossing the Knicks or the Nets from the NBA… that wouldn’t go over too well.
Al Barbarino is the editor of recapitalnews.com