Funding Gap Has Now Spread to Multifamily

The funding gap that previously was identified only in the office sector has now spread to include multifamily properties, according to new estimates by CBRE.

By CBRE’s definition, “Funding gaps exist when investors are forced to refinance at a loan-to-value (LTV) ratio lower than the one at which they first borrowed, or when the value has fallen since the loan was originated.” The LTV ratio, in turn, is used by lenders to compare the amount of a mortgage with the appraised value of the property when they decide whether to issue a loan.

In June this year, CBRE evaluated loans originated from 2018 to 2020 and uncovered a funding gap of $72.7 billion in the office sector for loans maturing through 2025. By October, just four months later, that gap had grown to $82.9 billion.

Perhaps even more troubling – given that the problems in office are well known – it has now identified a similar funding gap in the multifamily sector. That gap totals $21.7 billion. Adding in loans issued in 2021 – “a big year for multifamily debt issuance” — the funding gap more than doubles to $44.54 billion for multifamily loans coming due in 2026. For office, it balloons to $112.8 billion.

In what may be considered an understatement, CBRE predicted “The volume of loans maturing, paired with rising cap rates, signal distress ahead for office and multifamily properties.”

In its June assessment of the office market, CBRE noted that the expected decline would not be uniform. That may be true for multifamily as well, with different regions perhaps experiencing different conditions.

The June office report noted that borrowers might have limited options, such as injecting more cash into their properties or seeking additional equity or mezzanine financing to pay off the existing loan. Or they could try to get their lenders to agree to a discounted payoff or loan extension. In the end, some borrowers might be forced to default.

Lenders, for their part, could try to package non-performing loans for sale at a discount on the secondary market. They might also agree with borrowers on loan workouts and short-term accommodations, the report said.

For investors holding on to $270.6 billion in capital on the sidelines, as noted in a Colliers report, distressed sales could represent a good opportunity while also establishing a price floor for troubled properties.