Fading allure of urban life leaves dent on US mortgage bonds

US cities are losing their allure for renters, placing early signs of strain on the $50bn market in bonds backed by mortgages on apartment blocks.

The coronavirus pandemic is still rolling through the global population and working from home remains the norm in many professions, pushing some city residents to pack up and leave. Data company Trepp has identified 50 so-called multifamily loans with a balance of $1.5bn where the occupancy rate of buildings dropped by 15 percentage points cent last year.

Investors in the $1.2tn market for commercial mortgage-backed securities, where loans backed by properties like apartment buildings are bundled together to underpin the sale of fresh debt, are watching closely.

“Is this the tip of the iceberg?” said Manus Clancy, head of research at Trepp. “Our thought is that the number of loans struggling with low occupancy levels has to go up.”

Trepp’s data underscores the risks in the commercial mortgage market. Despite investor exuberance spurred on by the prospect of a widely administered vaccine helping to push CMBS prices higher, it could still be some time before people return to working in office buildings in major cities where rents are steep.

“In the big urban cities we are seeing occupancy sinking,” said Mr Clancy. “It is expensive to live in these places and right now you can’t do anything with the available amenities and you are not going to the office. Those were often the reasons people stayed in their apartments. It’s not surprising these things are dwindling.”

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The occupancy rate of the NEMA luxury San Francisco apartment building that sits opposite Twitter’s corporate headquarters dropped to 70 per cent in 2020. The $200m loan behind it, backing a single-asset CMBS forged in 2019, has recovered in value since the darkest point of the pandemic’s blow to global markets. But it remains well below pre-pandemic levels. The triple B rated tranche of the deal is priced at 95 cents on the dollar, having traded at a premium of more than 115 cents on the dollar early in 2020. 

In New York, the 75-unit Chelsea29 apartment building on 29th street, boasting a roof terrace and fitness centre, has seen its occupancy drop to 75 per cent. It makes up just 2 per cent of a $1.3bn CMBS deal from 2019 that trades around 90 cents on the dollar, having clawed back ground since March.

The fall in occupancy tracked by Trepp affects only 4 per cent of the loans that had reported numbers by late 2020. Analysts and investors have expected a drop-off in rent payments for some time given the dwindling fiscal stimulus support.

But the strain comes alongside early signs that remaining tenants are also beginning to struggle to pay their rent. Analysts at the New York Fed warned of an “eviction cliff” in a white paper last month. The pandemic and related job losses “have limited residential and commercial renters’ ability to pay monthly expenses and landlords’ ability to keep current on mortgages,” the authors Marisa Casellas-Barnes and Jessica Battisto wrote.

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The National Multifamily Housing Association found that just over 75 per cent of households made a full or partial rent payment for the month by December 6, down almost 8 percentage points compared to the same point in the previous year. It marks the biggest year-on-year drop since the onset of coronavirus. The month ended with just shy of 94 per cent of tenants paying their rent.

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

This article has been updated since publication to make clear that $1.2tn is the value of the entire CMBS market


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