Fitch: Oil Industry Exposure, Student Housing Spell Trouble for CMBS


Markets with exposure to the oil industry and student housing developments are two areas of weakness to watch in the commercial mortgage-backed securities world, according to a Fitch Ratings report released this morning, What Investors Want to Know: Under One Roof—U.S. Housing Forum 2016.

Houston and the Bakken Shale region of North Dakota are the markets with the most notable exposure to the oil industry, according to the report. Although the Bakken Shale region only comprises a small overall portion of U.S. CMBS, the low oil price is already affecting performance on a number of multifamily properties there. Houston and Dallas are far more diversified than they were in past oil downturns, but Fitch expects that oil price ripples will affect job growth and subsequently become a drag on the performance of multifamily properties in these cities.

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Approximately 10.4 percent of Houston’s total new multifamily supply is forecast to come online by 2020. Coupled with the city’s oil industry exposure, this could indicate a greater performance drop-off than other markets facing large amounts of new supply. Commercial real estate data provider Reis projects that Houston’s vacancy rate will increase to 7.2 percent in 2020 from 5.8 percent in 2015.

Austin, Texas, although not reliant on oil, is also seeing a large amount of new supply with 10,259 multifamily completions forecasted for 2016. Fitch expects that the combination of this new supply and slowing job growth may lead to deterioration in multifamily performance. Reis projects that Austin’s vacancy rate will increase to 7.2 percent in 2020, from 6.1 percent in 2015.

The second area of concern outlined by Fitch, student housing, continues to raise red flags for CMBS 2.0, with record numbers of new supply entering the market each fall. In 2015, approximately 48,000 student housing units were delivered, with a similar amount forecast for 2016. Although the units have been well absorbed and vacancies are hovering around 2 percent for 2017, certain properties continue to experience performance deterioration due to occupancy declines, increased expenses, deferred maintenance, and/or average rent declines. Some of these factors may be related to poor property management, superior properties entering the submarket or declining student enrollment at the nearby college or university, according to the report.