The New York tenant protection legislation enacted last week by the state Legislature has negative credit implications for multifamily lenders with concentrated exposure to the NY metropolitan area, Fitch Ratings says. The new laws, which strengthen tenant protections in New York City (NYC) and the state, do not necessarily translate into immediate ratings revisions for impacted banks. The new law limits the circumstances, frequency and amount by which landlords can raise rents on rent-stabilized units in NYC apartment buildings. This will translate into lower growth in rental and operating income, less room for capital improvements and potentially result in declining property values.

To the extent that loans secured by stabilized apartments have been underwritten to in-place rents, the impact on default risk is relatively neutral over the near term. However, the law may deter investment and reduce investor appetite for rent-stabilized apartments, resulting in downward pressure on property values.

If realized, a significant decline in property values, and hence borrower equity, presents refinancing risk for highly leveraged borrowers, which Fitch views as the primary downside credit impact associated with the new law. The typical tenor of multifamily loans securing rent-stabilized properties is five years to seven years; potential losses associated with such an outcome will likely only manifest over time.

Concentrated NYC multifamily lenders have been sensitive to changes in rent regulations for some time, which Fitch has factored into current ratings. The stable cash flow generation demonstrated by rent-stabilized multifamily properties over economic cycles has historically been viewed positively. The proven stability of through-the-cycle occupancy rates relative to more expensive luxury apartments has supported the ratings of concentrated multifamily lenders. Stable occupancy in these buildings is expected to be maintained in light of the tenant-friendly proposals. However, over the longer term, to the extent that these regulations deter maintenance and capital expenditure needed to maintain these properties, occupancy rates and property values may also be negatively affected.

The new law abolishes certain provisions that have allowed landlords to remove units from rent stabilization when a unit becomes become vacant and the rent is above the statutory high-rent threshold. It also abolishes deregulation when a tenant's income exceeds $200,000 in the preceding two years.

Preferential rents are set below the legal maximum that can be charged. For lease renewals, owners who have offered tenants a preferential rent below the legal rent are prohibited from raising the rent up to the full legal rent upon lease renewal. However, once a tenant vacates, the owner can charge rent up to the full regulated rent if the tenant did not vacate due to the owner's failure to maintain the unit in habitable condition. The law also eliminates the "vacancy bonus" rule that have allowed landlords to raise rents by up to 20% upon vacancy as well as the "longevity bonus" that allows rents to be raised by additional amounts based on the previous tenancy's duration.

Landlords' ability to impose rent increases after major capital improvements (MCI) has also been hindered. Rent increases for MCI have been capped at 2% from 6% with qualifying expenditures significantly curtailed. Unlike loans funding rent-stabilized properties, loans that back apartment capital improvements tend to be higher risk. Absent significant creditor protections, exposure to such loans is viewed as incrementally credit negative in light of the MCI proposals.

Commercial and multifamily real estate finance firms are preparing for the transition away from the London Interbank Offered Rate (LIBOR), but there is little uniformity when it comes to the details, according to the results of a new survey by the Mortgage Bankers Association’s (MBA) LIBOR Outreach Committee.

LIBOR is used as the base rate for more than a trillion dollars of adjustable-rate commercial and multifamily mortgages and is potentially set to expire at the end of 2021.

“The vast majority of commercial and multifamily mortgage lenders report they are working on the transition away from LIBOR, but the devil is in the details,” said Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research. “Most firms are already taking some steps, including changing language in loan documents, but they also report relying on regulators and industry-bodies to make decisions before they take certain actions. The net result is a fair amount of uncertainty about the mechanics of the transition away from LIBOR, and an overall hesitation as many firms wait for others to lead the way.”

MBA’s survey of commercial and multifamily mortgage lenders found that 92 percent of respondents have begun planning for the transition away from LIBOR, and 77 percent have already adjusted LIBOR fallback language in all new loan documents. More than half – 56 percent – say they are right on track in preparing for a future without LIBOR.

When it comes to detailed plans for the transition away from LIBOR, surveyed firms’ responses are more varied. For example, less than half (41 percent) said they anticipate using the Secured Overnight Financing Rate (SOFR) as the alternative to LIBOR, while 43 percent said they don’t know what rate they will use. Less than one-third of firms (32 percent) indicated they will implement an adjustable-rate alternative to LIBOR in advance of the cessation of LIBOR, while 18 percent said they will not; 37 percent said they don’t know.

When asked if they will follow the recommendations of the Alternative Reference Rates Committee (ARRC), 59 percent said they don’t know. More than half of firms, also 59 percent, said they are relying on regulators/industry-bodies to make decisions before they take certain actions.

“With more than $1 trillion in commercial and multifamily mortgage debt tied to adjustable rate indices, the LIBOR transition has the potential to create major disruptions for borrowers, lenders, investors, and everyone in-between,” said Andrew Foster, MBA’s Director of Commercial Real Estate Finance. “MBA and its LIBOR Outreach Committee of members are developing resources to educate market participants and help ensure all stakeholders are focused on the important issues, with the goal of a smooth transition. Given all that is at stake for the commercial real estate debt markets, as well as many other asset classes that utilize LIBOR, an ounce of preparedness is worth a pound of cure."

On Thursday, June 6, as part of its overall strategy of preparing members and consumers for the LIBOR transition, MBA will release a Single-Family LIBOR Disclosure Template, designed for lenders to share with borrowers who are considering new single-family, adjustable-rate loans. In the coming months, MBA will work to develop another disclosure template intended for consumers with existing single-family, adjustable-rate loans that are indexed to LIBOR.

Earlier this year, MBA’s Commercial/Multifamily LIBOR Outreach Committee, released a paper titled, “Primer on Evolving Issues for LIBOR Transition and Commercial Mortgage Market Challenges,” which offers key action items that member firms need to address, and identifies emerging issues to prepare for in the transition away from LIBOR. The primer and survey are part of MBA’s efforts to elevate key issues, share ideas for best practices and be an ongoing resource for the industry throughout the LIBOR transition. For more information, visit: https://www.mba.org/advocacy-and-policy/cmf-policy-issues/cref-ecosystem/libor.

MBA’s survey on LIBOR transition preparation was conducted in May 2019. Surveys were sent to 115 commercial/multifamily lenders that reported closing loans in 2018. MBA received 43 completed surveys, along with additional responses from firms that did not complete the survey because they do not make LIBOR-based loans.

Commercial and multifamily mortgage loan originations rose 12 percent in the first quarter compared to the same period last year , according to the Mortgage Bankers Association’s (MBA) Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations. In line with seasonality trends, originations the first three months of the year were 34 percent lower than the fourth quarter of 2018.

“The momentum seen in 2018’s record year of borrowing and lending continued in the first quarter of this year,” said Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research. “First quarter volumes were higher for nearly every property type, and double-digit growth in loan volume for Fannie Mae and Freddie Mac led the increase among capital sources. Low interest rates and strong property values continue to make commercial real estate an attractive market for borrowers.”

Compared to a year earlier, a rise in originations for industrial, health care and hotel properties led the overall increase in commercial/multifamily lending volumes. By property type, industrial (73 percent), health care (41 percent), hotels (14 percent), retail (9 percent) and multifamily (9 percent) all saw year-over-year gains by dollar volume. The dollar volume of office property loans was unchanged.

Among investor types, the dollar volume of loans originated for Government Sponsored Enterprises (GSEs – Fannie Mae and Freddie Mac) increased by 14 percent year-over-year. Life insurance company loans increased 7 percent, commercial bank portfolios increased 6 percent, while loans originated for Commercial Mortgage Backed Securities (CMBS) decreased 4 percent.

As is typical in the first quarter, originations decreased in comparison to last year’s fourth quarter, with total activity falling 34 percent. Among property types, declines were seen in health care (49 percent), hotels (45 percent), multifamily (40 percent), retail (32 percent) and office space (30 percent). Industrial properties bucked the overall trend, rising 17 percent from the fourth quarter of 2018.

Among investor types, the dollar volume of loans for GSEs decreased 43 percent, originations for commercial banks decreased 34 percent, loans for life insurance companies decreased by 28 percent, and loans for CMBS decreased 22 percent.

Commercial and multifamily mortgage bankers closed a record $573.9 billion in loans in 2018, according to the Mortgage Bankers Association’s (MBA) 2018 Commercial Real Estate/Multifamily Finance Annual Origination Volume Summation.

Commercial bank portfolios were the leading capital source for whom loans were originated in 2018, responsible for $174.0 billion of the total. The government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac saw the second highest volume, at $142.3 billion, and were followed by commercial mortgage-backed securities (CMBS) issuers, life insurance companies and pension funds, and REITs, mortgage REITs and investment funds.

In terms of property types, multifamily properties saw the highest volume of mortgage bankers’ origination volume, at $266.4 billion, followed by office buildings, retail properties, industrial, hotel/motel and health care. First liens accounted for 96 percent of the total dollar volume closed.

“Borrowing and lending backed by commercial and multifamily properties hit another new record last year,” said Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research. “Solid fundamentals, growing property values, low interest rates and strong appetites from both borrowers and lenders all helped drive an 8 percent increase in recorded multifamily lending from a year ago. Repeat participants in our survey increased their lending by 4 percent during 2018, with the remaining growth coming from the addition of new firms.”

Added Woodwell, “Many capital sources rose to record levels of lending— including bank portfolios, life insurance companies, and the GSEs (Fannie Mae and Freddie Mac). Among property types, multifamily pulled even further ahead as the dominant lending target, growing to 46 percent of total mortgage banker lending – a series high.”

The reported dollar volume of commercial and multifamily mortgages closed last year was 8 percent higher than the volume reported in 2017. Among repeat participants in the survey, the dollar volume of closed loans increased by 4 percent.

For a copy of the report, visit MBA's Online Store at: https://www.mba.org/news-research-and-resources/research-and-economics/commercial/multifamily-research/annual-origination-volume-summation