Multifamily Capital Markets Continue to Struggle

Lending to the multifamily sector has slumped 55% in the year ending in the third quarter of 2023, according to Newmark’s 3Q 2023 U.S. multifamily capital markets report. And the months ahead seem no brighter either for loan originations or loans scheduled to mature by 2025.

Loan originations plummeted 33% even between 2Q 2023 and 3Q 2023, hitting their lowest level since 2014. Bank and CMBS or CRE collateralized loan obligations (CRE CLO) contracted sharply. Debt fund lending fell more modestly while the insurance share remained stable.

However, lending by government-sponsored enterprises rose from multiyear lows, “playing their role in improving stability in the finance markets.” That could change later in the decade when the report predicted there will be more at-risk GSE loans, though it is “premature to focus overmuch on these.”

As Newmark has reported previously, $682 billion in multifamily loans will mature between 2023 and 2025, of which banks account for 52%. Debt funds hold 19% of loans coming due in this period, and securitized lending is similarly frontloaded. Not surprisingly, these are the sectors that have cut back most severely on new lending. A significant portion of these troubled loans were for short durations and funding value-add projects.

To add to the problems in multifamily lending, the yields on investment grade BBB bonds have now overtaken multifamily debt costs – reversing a historical pattern. Furthermore, the higher debt costs of refinancing multifamily loans will be a challenge, forcing some borrowers to pay down their debt, pursue a loan modification, return the keys and/or source rescue equity at an appropriate price point, the report noted. Debt service risk will rise “dramatically,” it said.

The 39% of borrowers with a debt service coverage ratio of 1.25x will struggle to refinance, even leaving aside valuation concerns. “The maturing loans are biased toward CRE CLO loans, which include higher shares of transitional, floating-rate debt,” Newmark stated. “Floating rate multifamily maturities are in trouble.” This also applies to single asset single borrower (SASB) loans, as well as debt fund originations and other types of loans.

“The distribution of LTV (loan to value) ratios for multifamily are more favorable overall [than for offices], but the greater size of the multifamily market and the concentration of lending during the recent liquidity bubble drive high nominal exposure,” the report noted.