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  • Writer's pictureRealFacts Editorial Team

This is Where Multifamily Distress Can Be Found


multifamily housing

In the current multifamily real estate market, distressed buyers are finding themselves in a challenging position. Despite the prevalence of troubled loans in the sector, actual distress remains relatively low. Many multifamily loans are being extended, delaying the anticipated wave of distressed sales. However, there are specific areas where distress is more pronounced, particularly in certain value-add deals and construction loans in the booming Sunbelt markets.


Identifying the Pockets of Distress


According to insights from Yardi Matrix, three main categories of deals are experiencing significant distress:


1. Value-Add Deals Financed with Short-Term Debt in 2020–2022:

   These deals are grappling with the dual pressures of rising interest rates and extended timelines for project completion and lease-up. Financed during a period of low interest rates, these projects are now facing refinancing challenges as rates have climbed. The short-term nature of their debt exacerbates the situation, making it difficult to secure extensions without substantial financial restructuring.


2. Value-Add Deals Owned by Syndicators Lacking Financial Reserves:

   Syndicators, particularly those without deep financial reserves, are finding it tough to navigate the current market conditions. These owners often cannot afford to pay down loan balances or fund necessary reserves to secure loan extensions. This financial fragility is leading to increased distress within this segment, as they struggle to meet their financial obligations amidst an uncertain market.


3. Construction Loans in High-Growth Sun Belt Markets:

   The Sunbelt markets, known for their rapid growth and development, are witnessing a slowdown in lease-up rates for new constructions. The extensive supply pipeline in these areas is contributing to a longer-than-expected lease-up period, placing additional strain on construction loans. The delay in achieving full occupancy is resulting in financial distress for many developers who are unable to meet their loan obligations within the projected timelines.


The Broader Context of Multifamily Distress


Despite these pockets of distress, the overall level of distressed multifamily loans remains relatively low. The National Multifamily Housing Council, citing FDIC data, reported that the percentage of non-current multifamily loans doubled to 0.3% in 2023. While this is a notable increase, it is still significantly lower than the peak rate of 4.7% seen during the global financial crisis.


Future Scenarios and Market Implications


The future trajectory of multifamily distress is closely tied to the performance of the capital markets. Several scenarios could unfold over the next year:


- Decline in Treasury Yields:

  If the 10-year Treasury yield falls to the low-4% range or below, transaction activity is likely to resume. This would enable borrowers to refinance more easily, potentially mitigating much of the current distress.


- Rise in Interest Rates:

  Conversely, if interest rates rise, the likelihood of increased distress becomes more pronounced. Higher rates would exacerbate the financial pressures on distressed assets, potentially leading to more foreclosures and distressed sales.


- Stagnation in Current Rate Range:

  The most likely scenario, according to Yardi, is that interest rates will remain within their current range. This would result in a continuation of the status quo, with market players waiting and hoping for more favorable conditions. In this environment, market activity would remain slow, and the existing distress could persist into 2025.


Opportunities for Borrowers


For borrowers capable of extending their loans, there are still ample opportunities to secure financing. Government-sponsored enterprises (GSEs), debt funds, life insurance companies, and commercial mortgage-backed securities (CMBS) are all actively lending. Many borrowers are seeking fixed-rate loans with five-year terms and prepayable options to lock in current rates while maintaining future flexibility.


Variable rate loans have become prohibitively expensive due to the high secured overnight financing rate (SOFR), which remains above 5%. The cost of buying interest rate caps has also surged, pushing borrowers towards fixed-rate solutions to manage their financial risk.


While multifamily distress remains low overall, specific segments are experiencing significant challenges. Value-add deals with short-term debt, syndicator-owned properties without financial reserves, and construction loans in the Sunbelt are the primary areas of concern. The future of this distress will largely depend on the movement of interest rates and the broader capital market conditions. For now, borrowers and investors must navigate a complex and uncertain landscape, balancing the need for financial stability with the pursuit of long-term opportunities in the multifamily sector.

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