Nearly one quarter of all collateral securing CMBS in 2002 were multifamily properties, making the multifamily sector the third largest asset class after retail and office, according to a recent report by Moody’s. Forty percent of the collateral securing CMBS last year was retail, and nearly 24% was office. The rating agency considers multifamily housing a lower long-term risk than other asset classes primarily because multifamily housing boasts the lowest default rate of the major property types.
"Fundamentally, multifamily is less risky than other asset types for several reasons: There is generally less cash flow volatility, they have lower operating expense ratios, they are less capital intensive than other property types, and refinance possibilities include Fannie Mae," says Stewart Rubin, author of the Moody’s report. Location also plays a significant role in the rating: Prime locations include large metro areas, inner-ring suburbs and edge cities that have high barriers to entry and are supply constrained.
On the downside, Rubin notes the multifamily sector’s short-term leases — a drawback that is tempered by "the reality of high residential lease renewal rates," according to Rubin.
Overall, Moody’s ranks multifamily as one of commercial real estate’s best performing asset classes. Moody’s has tracked the sector since 1982, and multifamily has consistently beaten out the office, industrial and community retail classes.