Navigating Turbulent Waters

For years, the multifamily market enjoyed falling interest rates, rising rents, and a surge in new household formations, making it a solid investment. COVID only intensified this growing trend, leading to a frenzy of multifamily deals in 2021.

The initial appeal of investing in multifamily stemmed from low rents and easy access to capital. But soaring borrowing costs along with an increase in insurance and labor costs, property taxes, new construction and intensifying competition over the last few years have made their impact. Fitch Ratings foresee a 2x increase in the delinquency rate, reaching 1.3% in 2024, surpassing pandemic levels. By 2028, the $1 trillion in multifamily debt scheduled to mature raises serious concerns about the defaults and losses ahead.

The dynamics are already at work as MSCI Real Assets has identified over $67 billion in multifamily loans at risk.

High-end complexes and downtown high-rises are experiencing lower occupancy rates. Notable lenders, such as Arbor Realty Trust Inc., are under scrutiny for distressed loans, and major players like Lennar Corp. are considering selling thousands of apartments to offset losses. Experts anticipate difficulty in rapidly growing markets like Boise, Phoenix, and Austin. Borrowers in these areas may need to increase equity contributions due to higher interest rates and lower cash flow growth. While stress is significant, it's not yet seen as a widespread industry crisis.

Evaluate. Strategize. Prepare.

Jilliene Helman, CEO of Realty Mogul, highlights a critical difference between multifamily properties with floating-rate and fixed-rate debt. Sellers with fixed-rate debt are holding onto assets, anticipating economic dislocation resolution. In contrast, owners with near-term maturities on floating-rate loans face decisions to sell, seek extensions, or refinance with additional capital.

Industry players are adopting varied strategies to navigate these challenges. Some are creating short-term structured credit platforms to handle distressed situations, while others, like Slate Property Group, are expanding their platforms to make informed decisions in multifamily deals. The focus is not only on debt but also on providing structured equity to sponsors facing financing gaps.

Multifamily lenders and investors recognize situational distress and prepare to address it through innovative approaches. The Connor Group in Ohio anticipates opportunities as debt-distressed markets reset, but founder Larry Connor emphasizes that the true impact might not be felt until the end of 2024.

While the U.S. multifamily market faces significant challenges, stakeholders who actively strategize now will get ahead of a potential storm. As the industry navigates through rising costs, maturing debts, and increased competition, a nuanced approach is crucial. The multifamily sector, once a darling of commercial real estate, is at a crossroads, and only time will reveal the extent of the impact and the resilience of the market.

Don't wait until the last minute. We are here to lend an ear, strategize, and collaborate with you about the best pathways to success.

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