Distressed Multifamily Borrowers Are Holding On

Multifamily rescue funds waiting for distressed borrowers seeking exits or bailouts to come knocking at their doors are no doubt disappointed and impatient.

Simply put, multifamily housing loan distress has been “slow to arrive,” according to Yardi Matrix.

“Because many borrowers expect interest rates to go down further over the next two years, few want to lock in long-term loans at current rates that start in the low 6% range,” the report said.

In Yardi Matrix’s database of 58,000 multifamily loans totaling $1.1 trillion, loans on 6,800 properties totaling nearly $150 billion are set to mature by the end of 2025, and $525 billion will mature through the end of 2029, according to the report.

The 30-day delinquency rate for the $1 trillion of loans held by Fannie Mae and Freddie Mac, the largest multifamily lenders, was less than 0.50% as of the end of 2023, while commercial banks were about 1%. The CMBS multifamily delinquency rate was higher, but still only 1.8% as of February, per Trepp.

Community banks have the most stress, primarily because some have high exposure to construction and other CRE loans. San Francisco had several high-profile defaults lately, “lenders have been quick to extend loans with borrowers who are willing to pay down some of the loan balance or add extra reserves,” according to the report.

Mortgage rates at Fannie and Freddie have come down 75 basis points to 100 basis points since peaking last fall.

Meanwhile, borrowers today are demanding fixed-rate loans with five-year terms that give them prepayment flexibility. CMBS is emerging as one option, Yardi Matrix said, as it allows borrowers to reduce the coupon rate by paying a percentage of the balance as a fee.

So, one eye continues to focus on distressed real estate assets while the other checks the calendar.

Expected 2024 commercial real-estate maturities rose 35% from previous estimates, according to a recent report from PGIM Real Estate.

The spike is driven by the “extend and pretend” practice by banks that accelerated last year and into this year.

MSCI Real Assets noted in a recent report that $214 billion in mortgages slated for maturity in 2023 were, to their knowledge, not refinanced, nor was there a sale of the underlying property, The Wall Street Journal reported last week.

“We believe that these loans have been granted some short-term extension to their maturity date,” MSCI Real Assets wrote.

The trend is part of an interesting wrinkle where borrowers are strategizing next moves based on the calendar and seemingly imminent interest rate cuts from the US Federal Reserve.

Loan coupons now start below 6% for stable assets with low leverage.

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