The Multifamily Housing Squeeze: Rising Rates and Refinancing Risks

As reported by Bloomberg

Driving the news: Multifamily apartment investments boomed during the pandemic, but the tide is turning as borrowing costs surge and refinancing challenges mount.

• Pandemic boom: Developers and investors capitalized on low interest rates and high rental demand, constructing new units and renovating older complexes.
• Current crunch: Fitch Ratings warns that stabilizing rents, rising expenses, and increased competition are creating refinancing struggles, with the delinquency rate projected to double this year to 1.3%, surpassing pandemic levels.

By the numbers:

• $1 trillion of multifamily debt maturing through 2028, per Trepp data.
• $67 billion worth of multifamily assets potentially distressed, according to MSCI Real Assets.
• 11,000 apartments Lennar Corp. may sell to reduce sector exposure.

The big picture: Short sellers are eyeing profits from the emerging distress as more than $1 trillion in multifamily debt matures over the next few years, raising default risks for banks and bondholders.

• Expert take: "I expect a great deal of pain in multifamily as we adjust to a higher interest rate environment along with a lot more supply hitting the market in 2024," says Daniel McNamara, founder of Polpo Capital.

Market impact:

• Localized distress: Markets like Boise, Phoenix, and Austin, which saw rapid growth, are now showing signs of softening.
• Occupancy battles: High-end complexes and downtown high-rises are experiencing lower occupancy rates, according to the Federal Reserve Banks of Atlanta and San Francisco.
• Project delays: Higher interest rates have led to cancellations and delays of some projects in the St. Louis Fed’s region.

What they're saying:

• Jim Costello, MSCI Real Assets: “There were a few unprofessional people getting over their skis. Current price declines are bringing values back to pre-pandemic trend levels.”
• Alan Todd, Bank of America: Stress will be isolated to rapidly growing markets, with some borrowers needing to inject more equity due to higher rates and lower cash flow growth.
• Chris Hentemann, 400 Capital Management: Issues will affect properties hitting maturity events or those with variable financing, especially if rents can’t be raised to match debt costs.

What's next: The multifamily sector faces pockets of stress but isn’t expected to experience systemic issues. Investors and developers must navigate the new landscape of higher interest rates and increased market supply.