Stress Mounts on Multifamily Properties Amid Rising Costs
What's happening: High borrowing rates and rising operational costs are placing significant stress on multifamily properties, signaling a growing credit risk in commercial real estate, according to the Office of the Comptroller of the Currency (OCC).
Why it matters: The OCC's latest report highlights increased risks in the U.S. apartment market, exacerbated by rising interest rates and insurance costs. This comes as the office market remains a major concern.
By the numbers:
- Interest rates: Elevated rates, maintained to combat inflation through the first half of 2024, are impacting commercial property loans.
- Mentions: Multifamily risks were mentioned 12 times in the current report, up from six mentions in December 2023.
Key points:
- Multifamily pressures: Operating costs for multifamily property owners are climbing, particularly in rent-controlled areas like New York City and California.
- Overbuilding: Markets such as Salt Lake City and Nashville are experiencing overbuilding of luxury properties, devaluing older ones.
- Office woes: Office properties continue to face significant stress, with the national average office property price down 13% from its late 2021 peak, and an additional 15% decline expected by year-end 2025.
- Refinancing risks: Loans nearing maturity, especially interest-only loans, pose added risks. Borrowers may need to inject cash equity or provide additional collateral due to higher debt costs and lower property values.
What's next: The OCC categorizes the growing risks from office and multifamily properties as "moderate" but notes the potential for further challenges as more loans come up for refinancing in the next three years. Other commercial property types, such as retail and industrial, remain generally stable but are showing signs of softening.
The bottom line: With multifamily and office sectors under increasing strain, the commercial real estate landscape faces significant challenges ahead, necessitating close monitoring and strategic adjustments by stakeholders.
