There is $436B of Multifamily Debt That is Potentially Troubled

The repercussions of the Fed’s early efforts to stave off the economic disaster caused by Covid through measures to stimulate the economy like zero interest rates and buying up mortgage-backed securities are about to ripple through the multifamily sector, according to Newmark’s 2023 U.S. Multifamily Capital Markets Report.

“Multifamily received tremendous capital inflows during the pandemic liquidity bubble of 2020 to the first half of 2022. This was reflected both in transaction activity, as well as pricing for both debt and equity,” the report noted. “Now these loans are coming due and in a very different environment than when they were originally issued.”

Newmark’s data shows that $87 billion of multifamily loans originated during the bubble will mature in 2023, $96 billion in 2024, and $63 billion in 2025. Those loans will mature at a time of higher debt costs and more restrictive bank lending practices.

In total, it found $436 billion of multifamily debt is potentially troubled, while total CRE debt in the same condition amounts to $1.2 trillion.

Rising multifamily financing rates are likely, which will in turn lower return for all. This will leave borrowers with three choices: pay down the debt, try to refinance the principal or partially pay down, or “pursue a loan modification, return the keys and/or source rescue equity at an appropriate price point,” the report predicted. 

It estimated the interest rate on corporate debt through 2029 would be around 5.7%, and this would be the floor for CRE debt costs. “Most loans will be able to absorb higher interest costs; many will not.”

Newmark estimated that 38% of upcoming securitized multifamily debt maturities had a DSCR (debt service coverage ratio) of 1.25x – generally considered by lenders to be the minimum to prove ability to repay and cover expenses; 22% had a DSCR of 2.0x or higher. “These maturities will struggle to refinance even before taking valuation concerns into account. The maturing loans are biased toward CRE CLOs (collateralized loan obligations), which include higher shares of transitional, floating-rate debt,” it noted.

To add to the problems borrowers face, “declining multifamily values threaten sustainability of 2020 to 2022 financings,” the report cautioned.

Banks are heavily exposed to the ups-and-downs of the multifamily market. Banks account for 52% of such loans that will mature by 2025, and 32% of loans that will mature between 2023 and 2032. Other capital sources that are exposed include securitized lending and debt funds – which account for32% of potentially distressed loans but only 20% of maturing loans. 

“It is troubling and, perhaps, not coincidental that these are the lending sectors that have most reduced activity of late,” Newmark commented.