Trepp is keeping a close eye on San Francisco and San Jose multifamily-backed loans, putting both metros near the top of its distress “watch list” for 2023.
Nationwide, San Francisco is the second-most market in danger of distress on its $5.42 billion in multifamily-backed loans. It is positioned behind only St. Louis, where 14 percent of multifamily properties have a debt service coverage ratio below 1, which means they do not have enough operating income to cover their obligations. In the San Francisco metro, which also includes Oakland and Hayward, nearly 9 percent of multifamily properties have a DSCR less than 1 and weighted average net cash flow is down nearly 7.5 percent year-over-year.
“With major tech companies cutting costs and conducting mass layoffs, the Bay Area housing market has witnessed some tectonic shifts,” according to the report. “Most of these new remote and laid-off workers would have been first-time entrants in the multifamily housing market, and now this demographic is drastically dwindling in the Bay Area metro.”
The only other market on the watch list with a bigger drop was San Jose, where net cash flow went down more than 13 percent — the biggest year-over-year decline on the list. But the South Bay metro, whose $4 billion in apartment loans includes Sunnyvale and Santa Clara, had fewer properties that could not meet their debt obligations than in San Francisco. Also, San Jose had a higher occupancy rate. That pushed it down to the number six spot on the watch list, behind Seattle, Chicago and Minneapolis.
Another source of concern in both Bay Area markets is the low percentage of loans that originated in the first nine months of last year, at about 5 percent in San Jose and 7.5 percent in San Francisco. That means a higher percentage of loans are likely to need to refinance soon and at much higher interest rates.
San Francisco has recently seen its biggest apartment owner and manager Veritas have difficulties refinancing its $450 million loan backed by 62 multifamily buildings, putting the loan into special servicing.
Trepp’s Manus Clancy said the Veritas default likely took some in the industry by surprise as the multifamily CMBS market is perceived as a safer bet than retail or office loans, which have had some high-profile local defaults of late. The report agrees that multifamily had been considered a “darling” commercial property type, but that “anemic” demand and declining asking rents in the later half of 2022 pointed to trouble ahead.
“The shift in rent growth trajectory is a concerning development that warrants attention, especially if the trend continues well into the spring when leasing demand typically increases,” the report reads.