Quality of new loans on apartment buildings drops nationwide

Aug.August 19, 2011 12:35 PM

The quality of new loans on U.S. apartment properties declined in the second quarter, putting multifamily properties at a larger risk of price decreases should rent growth stall, Bloomberg News reported, citing a study by Chandan Economics. The ratio of rental income to loan balances on high-rise apartments fell to 8.7 percent from 9.7 percent a year earlier, Chandan Economics said.

“In effect, apartment and office borrowers are encumbered with more debt for every dollar of cash flow their properties produce, heightening downside risks should property values adjust or cash flow decline,” Sam Chandan, founder of the New York-based Chandan, said.

In major cities such as New York, Washington and San Francisco, where property prices have improved the most, apartment debt yields fell to 7.5 percent in the second quarter from 8.6 percent in the same period a year earlier.

Debt yields on office buildings fell to 9.7 percent from 9.8 percent in the first quarter and 12.1 percent a year earlier. [Bloomberg]

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