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In the current economic climate there are many portfolio segments at potential risk due to environmental, political and other external factors. It is multifamily, however, – long seen as one of the safest CRE property types – that regulators and industry experts have begun raising concerns about.

The OCC has expressed concern over increasing risk growing in niches in CRE lending for the past few years. But it was in their recent “Semi-Annual Risk Perspective”, presented last month at RMA’s Loan Review Department Managers Forum, where they sounded alarms about emerging risk in Multifamily CRE.

The OCC presentation mentioned multifamily vacancy rates are well above the national rate for many metro centers including Atlanta, Austin, Charlotte, Dallas, Denver, Nashville, Orlando, Phoenix, Tampa and Houston as net absorption is unable to keep pace with construction (these metros are showing a 10 – 15% multifamily vacancy rate). Furthermore, market conditions are stressed, as higher interest rates and other economic conditions have increased the risk that borrowers may need to refinance at higher rates while also experiencing cash flow challenges. Moreover, declines in CRE valuations for some property types like office and multifamily have increased re-margining requirements at maturity, increasing refinance risk. As such. loans are maturing in a very different environment compared to initial underwriting.

The OCC outlined what they consider to be key components of sound credit risk management practices to effectivity manage such risks:

• Stress testing at both the portfolio level (commercial and retail) and facility level (commercial);
• Timely and accurate information systems and reporting and effective concentration risk management; and,
• Timely and accurate risk ratings (always important as a best practice).

The website, BankRegData, which compiles and shares credit assessments based on analysis of call report data, issued a report in March detailing ”troubles brewing in the multifamily lending space”. BankRegData reported that Industry multifamily (MFR) delinquencies leapt from 0.97% in Q3 to 1.35% in Q4 in 2024. The 1.35% is the highest delinquency figure since the 1.53% logged in 2013 Q2.

BankRegData’s founder, Bill Moreland, points out that more than 60% of banks greater than $400 Billion in assets have a multifamily delinquency rate in excess of 1% and the $100 billion to $399 billion group is right behind at about 50%. On the other hand, in comparison, the sub-$1 billion banks have just 6.00% with a 1% or greater multifamily delinquency rate.

BankRegData commented that this comes as little surprise as they see the same pattern in CRE in general, but warns that this will not just be contained to larger banks. As time goes by, the delinquency issues migrate down the asset size food chain. This is not to say that all banks will have multifamily issues, however, BankRegData suspects it is a good bet that two or three quarters from now, smaller bank delinquency rate percentages will be significantly higher.

Also of concern are trends in multifamily chargeoffs – which jumped $145.95 million (93.71%) over 2024’s third quarter and are up substantially over the early 2023 periods. The $301.70 million in 2024 Q4 was the highest figure since the $454.37 million logged in 2011 Q4. Storm clouds appear to be gathering.

In a recent article in the RMA Journal “Insider” newsletter, Tom Cronin from AFS pointed out that oversupply of multifamily properties is a key driver in increased risk. As single-family homes have increased in cost, there was an expectation that multifamily demand would be solid for the foreseeable future, however, the higher end multifamily projects are more vulnerable to inflation and rising rents. In many of those projects “vacancies have been extremely high”, Cronin reported. Over 60% of the multifamily loans in Texas are considered “distressed”.

In early April, Ardmore attended the Philadelphia region RMA’s CRE Panel, which reviewed the current state of the real estate market with a focus on multifamily. In contrast to recent comments from the regulators, the panel noted that multifamily development in the Philadelphia market remains in strong demand, supported by favorable interest rates.

An audience member asked why the panel was so bullish on multifamily when the regulators recently stated concerns over increased risk in that CRE segment. One panelist explained that the risk was largely determined by the geographic market. Some markets are still very good (like Philadelphia) while others are not performing as well. Another panelist pointed out that you just have to be very smart about the location within the market, considering demographics, availability and proximity to amenities – like grocery stores. They also felt it was generational; younger professionals like to rent, living with more mobility and less commitments, and that isn’t likely to change in the foreseeable future.

Tariff Risks: Construction & Development

The RMA Philadelphia panel also highlighted challenges associated with construction and development, noting that new projects are currently on hold due to tariff-related uncertainties, which could inflate material costs by as much as 30%. Developers face increasing cash requirements and risk, necessitating more guarantees to secure financing. Opportunities for converting office spaces to residential were also discussed, but this process is complex and potentially costly.

The impact of tariffs was a significant focus, with expectations that they will raise construction costs considerably. Developers are adjusting their strategies, including sourcing materials domestically to mitigate these rising costs. Historical context was provided by comparing current challenges to post-COVID supply chain issues.

Key Takeaways

In a time of such economic uncertainty, it is always prudent to take a second look at all areas of the portfolio, but when a segment has been as historically stable as multifamily CRE, the need is much more significant. If you’d like a focused, unbiased look at all segments of your portfolio – including multifamily CRE – trust the credit risk professionals at Ardmore Banking Advisors and our proprietary solutions to provide you with the valuable insights that you’re looking for.

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