Years of southbound migration driven by capital and housing affordability challenges were bound to reverberate through the commercial mortgage-backed securities sector. Now, analysts say the movement has amplified funding demand and performance differences between securitized multifamily property loans in the U.S. Sunbelt and non-Sunbelt states.
Unrelenting consumer demand due to housing shortages, macroeconomic improvements, and statutory benefits that supported a rebound in multifamily commercial mortgage-backed security (CMBS) across the Sunbelt region in recent years will continue long term, said Ian Glaser, partner at Bridgeinvest, a national lender that has originated $2 billion in CRE loans, over 80% in the Sunbelt, since moving from New York to Miami in 2011.
Demand is not showing any signs of slowing down, Glaser said.
Favorable housing, living costs and appealing lifestyles continue to motivate Millennials and Generation Z migrants to relocate in the Sunbelt, he explained.
Changing investor preferences also contribute to the region's rebound. New business opportunities, the federal tax breaks since 2017, and friendly state-level business regulations are attracting asset managers who only a decade ago considered Miami, Charlotte, Dallas, and Austin secondary or tertiary markets, he said.
Sunbelt vs non-Sunbelt CMBS
U.S. CMBS loans backed by multifamily properties reflect the sector's historically steady performance, according to "Sunbelt Multifamily Continues to Perform Despite Some Cracks in Market Fundamentals," a commentary authored by Morningstar DBRS market expert Russel Dsouza and managing director Erin Stafford.
Up to 49.2% of the fifteen states known as the U.S. Sunbelt, as covered by Real Estate Information Service, Inc. (Reis), a property data provider based in Charleston, SC, saw rent growth between Q2 2023 and Q3 2024. Meanwhile non-Sunbelt markets reported declines of up to 10.5% of the Q2 2023 asking rent in certain markets.
The volume of Sunbelt multifamily private-label CMBS non-defeased loans, (which do not provide the prepayment or debt-servicing buffer afforded investors by defeased contracts), totaled $24.2 billion in 2024, led by Florida with $6.6 billion, according to Intex data.
The nationwide private-label CMBS multifamily loan delinquency rate, which typically is stable compared to other property types, Morningstar DBRS analysts wrote, increased steadily in 2024, reaching 5.2% in November 2024, up from 2.3% in November 2023.
Yet only 1.9% of the 2024, CMBS multifamily loan delinquencies are in the Sunbelt.
The special servicing rate was 6.53%, according to Intex. A total of $1.5 billion in non-agency multifamily loans was transferred to special servicing between Q2 2023 and Q4 2024. Of that amount, $570.3 million in loans were originated in Sunbelt markets, and $930.2 million were from outside the Sunbelt.
Analysts and multifamily CMBS investors are optimistic for multiple reasons, Glaser said. A confluence of housing demand, improving borrowing costs, favorable taxation, and capitalizing on CMBS loans maturing in 2025, will further unlock pent up capital from investors.
Cap rates, which tie to capital costs, normalized over the last six to 12 months, Glaser noted, and multifamily prices, which fell by 15% to 20%, should remain attractive. He expects healthier capital markets will lead to a 20% growth in CMBS deals nationwide, up to about $125 billion, as new capital from major investment vehicles tap the multifamily CMBS opportunity.
Sunbelt boom
The 2023 U.S. Census data show the Sunbelt population increased from 155 million in 2019, to 158 million, giving the region just under half of the U.S. population. The region accounted for 80% of the U.S. population growth in the past decade, and according to some estimates, may represent 55% of the nation's population by 2030.
In 2024, nationwide multifamily starts reportedly fell about 40% from peak levels in Q1 2023. The Sunbelt multifamily property inventory reached around 8.7 million units in 2024, a historic high, according to Reis, unhindered by high interest rates.
Amid the robust housing demand growth and the strained construction financing market nationwide, a more favorable environment has arisen in the South, according to Morningstar DBRS. The region benefitted from improved consumer sentiment, a total 100 basis points in interest rate cuts by the Federal Reserve in 2024, a low unemployment rate, and unaffordable homeownership.
The U.S. housing supply-demand imbalance is a structural problem that supports long-term outlooks for growth in multifamily lending in the Sunbelt region, and nationwide, Glaser said.
There are a couple of other reasons for optimism. The U.S. has a 4.5 million shortage of housing units, because of construction shortages after the 2008-2009 financial crisis. This could create demand for new construction. Depreciation is another driver, since the average age of existing rental units, 44 years, means much of the existing housing stock needs extensive repairs.
