Three reports from the Wall Street Journal. “Last spring, a real-estate lender hired three ratings firms to rate a series of bonds backed by speculative real-estate loans. Only one of the three got to rate all the bonds. Moody’s Corp. said about half were triple-A. Another firm said about 61% merited that grade. DBRS Inc. said two-thirds. The winner was DBRS, which had just changed its methodology for rating this type of debt. Moody’s was only hired to rate one of the eight bonds in the deal, and rival Kroll Bond Rating Agency Inc. for a handful. DBRS rated all eight.”
“The ratings-selection wasn’t unusual: It has become standard industry practice. Fierce competition among ratings firms in a fast-growing corner of the bond market is allowing issuers to cherry pick the most favorable ratings. The result is that securities deemed safe by the ratings firms have increasingly smaller cushions against losses.”
“To turn risky loans into investible debt, bankers use something called credit enhancement. In late June, the head of Kroll’s real-estate group, Eric Thompson, accused DBRS of easing rating standards to win business. ‘This is hauntingly familiar of legacy agency behavior precrisis,’ Mr. Thompson told the Commercial Mortgage Alert.”
“‘They are definitely lowering the bar now,’ said Henry Song, who owns some commercial real estate CLO deals in a $1.2 billion portfolio he manages at Diamond Hill Capital Management, Inc. in Columbus, Ohio, speaking generally about ratings firms. ‘You definitely can’t buy these bonds based on ratings.’”
“DBRS revamped its methodology this March. The change included a new ratings model that assigns a lower probability of default to multifamily versus other property types, according to Erin Stafford, DBRS’s head of North American commercial mortgage-backed securities analysis. Ms. Stafford acknowledged that credit enhancement has been lower under recently rated transactions but said the trend shouldn’t worry investors because the firm’s changes to its multifamily default assumptions were ‘historically proven out’ by DBRS data analysis.”
“The student-housing sector, which had become a darling of real-estate investors in recent years, is running into turbulence. About 3.9% of the debt backed by student housing that was converted into commercial mortgage securities was more than 60 days late at the end of November, according to Fitch Ratings Inc. That is up from 2.78% one year earlier, Fitch said.”
“Loan delinquencies for student-housing properties have increased to about 56% of all apartment sector delinquencies in November 2019, from 42% in November 2018. The problem is partly that student enrollment is flat or declining at some schools. Meanwhile, new and often amenity-rich student-housing developments have been sprouting in many markets. ‘Student housing remains a subsector of concern,’ a June Fitch report said. Problem loans were suffering ‘performance deterioration due to new supply and significant competition,’ the report said.”
“Rents for these higher-end developments ‘are hitting a rarefied universe and there is less demand,’ said Alexander Goldfarb, senior REIT analyst for Sandler O’Neill + Partners LP. ‘The [loan] delinquencies probably have…a lot to do with rents the developer was seeking but were not achieved.’”
“The 2019 market for Manhattan residential real estate was one of the worst in nearly a decade, data show, with some brokers walking away from their jobs because of a sales slump. Sales of existing Manhattan apartments this year fell to the slowest pace since 2011, according to a Wall Street Journal analysis of city property records. Overall apartment prices tumbled to a four-year low in the third quarter, and remained at the same low levels in the fourth quarter.”
“Frederick Peters, the chief executive of Warburg Realty, said that newer listings are coming on at more reasonable prices and asking prices on older listings are being cut, making it more likely that buyers will finally pounce. ‘Every day we get hordes of emails about price reductions, 20 to 25 a day.’”
From SocketSite in California. “The weighted average asking rent for an apartment in San Francisco, including one-off rentals as well as units in larger developments, dropped a little over 5 percent over the past quarter to $4,050 per month. While an end of year drop is typical, keep in mind that the average asking rent in the city is currently down around 2 percent on a year-over-year basis and 9 percent below its 2015-era peak of around $4,450 per month, with the average asking rent for a one-bedroom having slipped to $3,500 per month (which is around one (1) percent lower than at the same time last year and roughly 4 percent below peak).”
The Seattle Times in Washington. “City officials, urbanists and developers all agree that streamlining permitting for multifamily housing could help alleviate Seattle’s affordability crunch by bringing more units online faster. Yet in the years since that consensus emerged, it’s also started to take longer to build an apartment than ever before. That doesn’t mean growth has slowed — on the contrary. Seattle has seen booming multifamily construction that added nearly 100,000 rental units this decade, most of them since 2014, according to Fannie Mae. True to predictions, the apartment oversupply has been accompanied by a virtual rent freeze, though rents are starting to rise again.”
“That spurt of new construction, builders and the city agree, is the ultimate cause of the permitting backlog. But each camp claims the other has been overwhelmed by the building glut. Developers say the permitting office hasn’t staffed up quickly enough. And the city says developers are taking longer to make required corrections.”
The Central Oregonian. “Single-family home development appears to be slowing in Crook County, but multifamily apartment complexes have kept housing start numbers up in 2019. ‘It really kind of tapered off a few months ago,’ said Planning Director Josh Smith regarding the single-family dwelling numbers. ‘Pahlisch Homes is trying to plat its third phase, so there is probably going to be some pickup on their site, but for the most part, there are just a couple of little builds going on — single-family has really fallen off.’”
“City Associate Planner Casey Kaiser agreed, noting that the numbers for single-family permits will be down from the previous year, though multifamily unit numbers will be much higher. ‘So overall, the number of dwelling units I think will be up pretty significantly from last year,’ Kaiser continued, ‘but the deceiving thing is I think the single-family units are really more of the barometer for the appetite for builders and developers. Multifamily is a little bit more of an unknown quantity because we haven’t had a lot of big multifamily projects built (in Prineville).’”
“As they wait to see what the future holds in that regard, they are equally curious how the glut of multifamily units will impact the local real estate market. ‘The 135-unit, private-market-rate complex will be a pretty new and significant chunk of the market,’ Kaiser remarked. ‘When you think about it, it’s 135 dwellings being dumped into the market when it’s complete. That’s enough to move the needle in Prineville.’”
“Another curiosity is whether such a development will positively impact what has been a substantial lack of rental vacancy in Crook County in recent years. Smith notes that rent vacancy remains low locally but is not as severe as it was a couple of years ago. People are no longer showing up at Prineville City Council meetings voicing concerns about housing, he said. ‘It will be interesting to see how that (apartment complex) changes the market,’ he concluded.”