"nar·ra·tive: a way of presenting or understanding a situation or series of events that reflects and promotes a particular point of view or set of values"
---- 2024's prevailing narrative ----
It's almost as if every real estate pundit just discovered:
That mortgage rates were 3% a few years ago...
...which made home prices skyrocket.
...which made renting more attractive.
...which elevated rents.
...which made 4% cap rates seem reasonable.
...which made 70% LTV loans look like 50% LTV loans.
...which made lenders want more multifamily debt.
...which put even more downward pressure on borrowing costs.
...which made 5%+ development yields seem reasonable.
...which led to very robust supply pipelines.
Now there's a sudden recognition that trouble could emerge from new realities:
-- 7% mortgage rates
-- Excess supply
-- Stalled rent growth
-- Inflated seller expectations
-- Unrealistic buyer expectations
-- Less debt/transaction activity
-- Near-term maturities
-- Expensive interest rate caps
-- Normalized cap rates
---- Competing narratives ----
1. Titanic: All is lost.
2. Episodic: Pockets of investors will pay for their aggressiveness.
---- Our observations ----
Regardless of your bend, we thought it would be helpful to share a few data-based insights.
1. Floating rate focus:
We've focused our attention on the $61 billion in outstanding floating rate agency mortgages (Freddie K).
2. Deleveraging:
If pool-level averages are reasonably indicative, we estimate that borrowers will need to come up with about $7 billion (11% average paydown) to right-size outstanding floating-rate debt. ...assuming lenders are currently sizing to 8% debt yields and 65% LTV thresholds.
3. Sufficient coverage:
$59 billion of the pools (97%) have average DSCRs above 1.0x, which implies that most borrowers can cover debt service. Therefore, lenders may be more willing to extend maturities.
4. Most pools have some problems:
86% of outstanding pools have at least one mortgage that doesn't cover debt service.
5. But losses remain low:
Losses have rounded to zero to date.
6. Extend and pretend is a myth:
Extensions are occurring, but servicers are getting paid down and/or rate cap replenishment. i.e., extensions aren't free and no one is pretending.
7. Growing watchlist:
Nearly $13 billion (or 21% of the pools we analyzed) currently sits on a watchlist.
---- Quick stats ----
-- $40 billion originated 2020-22 (2,700 loans)
-- 20% of these loans in Texas
-- Avg debt yield below 7%
-- Avg coupon of about 3%
-- Less than 1% in special servicing
-- 20%+ on watchlist
-- Current avg LTV below 70%
-- Current avg DSCR of 1.5x
-- Current avg occupancy of 93%
What's your narrative: Titanic or episodic?
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