Watch out: Delinquencies on multifamily CMBS loans are increasing, and here’s why

The US multifamily market is ending the year with rising delinquency rates on CMBS loans. Trepp’s latest CMBS coverage report outlines that November saw multifamily delinquency rates increase to 1.81%, up from 0.85% in October.

Multifamily was the sole contributor to an increase in the overall CMBS delinquency rate, with all other major property types (industrial, lodging, office and retail) showing a decline in delinquency rates for November. This rate increased to 2.99%, up from 2.96% in October.

So, why are delinquencies increasing in the multifamily market? And how can multifamily investors and operators avoid becoming a part of the percentage?

Challenges refinancing mature loans

Moody’s Investors Services have reported that only 73.5% of maturing loans in quarter two have successfully refinanced, a drastic drop from 84.7% in quarter one.

“It is concerning to see that drop” states Darrell Wheeler from Moody’s, as he also comments the only other time a similar drop has occurred was during the pandemic. 

Higher interest rates seem to be the culprit, mixed with lower net operating income (when compared to debt). Joseph Cioffi of Davis+Gilbert LLP also comments that “valuations can shift in a recession, dropping NOI below desired or viable levels for refi.”

2023 opportunities for the multifamily market

So is it all doom and gloom? We don’t think so. These unique circumstances within the market foster the perfect environment for change and implementing different approaches to asset management.

2023 can provide improved asset valuations and increases to NOI should the multifamily sector offer flexible stays (short to mid-term leases) within assets.

Now let’s be clear, long-term tenancies should always be the main offering within multifamily buildings. Flexible stays, otherwise known as short-term rentals, should be used strategically within a number of apartments. 

The number of allocated apartments will vary by asset, depending on a variety of factors including:

• Demand in the local area
• Apartment type (e.g. studio, 1-bedroom)
• Competitor pricing and local supply levels
  
  

Increase multifamily net operating income (NOI)

Flexible stays increase NOI thanks to the premium prices guests are willing to pay for the flexibility. It becomes particularly lucrative when AI dynamic pricing technology is used.

This technology maximizes revenue by updating prices daily on marketing channels, setting apartments to the best price the market will pay for.

Popular marketing channels such as Airbnb optimize for occupancy, often decreasing daily generated revenue. However, dynamic pricing optimizes for both revenue and occupancy, meaning you don’t compromise on either. Prices update on over 450 marketing channels including Airbnb, so you achieve higher daily rents and occupancy rates without lifting a finger.

Improve multifamily asset valuations

It’s no surprise that adding supplemental, high-yielding income improves asset valuations. 
Short-term rentals not only gives guests flexibility but also investors, as it creates flexibility in the asset.

Rather than just waiting to increase long-term rent prices in compliance with control regulations, flexible stay strategies can be adjusted to cater for NOI and other business requirements.

In just eight weeks, Staykeepers achieved an entire building revenue uplift of 9.22% for a client. This could provide a potential capital enhancement of over $2 million.

You can request access to this case study from Greg below.