Word of Caution On U.S. Multifamily!

Most investors would place multifamily assets high up on their lists of bullet-proof real-estate investments but Mark Zandi, chief economist at Moody's Analytics isn't as upbeat about the multifamily sector and sees it, along with automobile loans, as the two greatest near-term risks to U.S. financial institutions.

Mr. Zandi's caution stems from rising multi-family backed debt held by financial institutions that has more than doubled since 2007. Favorable Basel III guidelines adopted by U.S. regulators in 2013 have also boosted multifamily lending since apartment loans on banks' balance sheets receive only half the risk-weighting of other commercial real-estate loans - making these loans more attractive to banks as they have to hold relatively less capital against potential losses.

Mr. Zandi believes that it is this perceived strength and crash-resistance of the multifamily sector that may lead financial institutions to overplay their hands and lose the requisite discipline in lending to the sector. Rising supply, especially in the luxury segment raises additional red flags for Mr. Zandi.

In fact, Mr. Zandi echoes sentiments expressed by Mr. Michael Stoler's (host of the famed Stoller Report) in his oped last year cautioning that tailwinds in the multifamily sector such as strong rent growth, low interest rates, and low commodity prices may be leading institutions to overlook potential headwinds in the form of interest rate hikes, rent regulations, increased supply, among others.

Overall, both these gentlemen stress the importance of discipline and caution in lending to a sector of real-estate that has witnessed some historically strong drivers since the last 5-7 years.

Mr. Zandi's article can be read here.

Mr. Michael Stoler's oped can be read here.