Distress buyers of multifamily assets are no doubt frustrated. Despite the high level of troubled loans in the sector, distress has stayed low as most multifamily loans are being extended. However Yardi Matrix has identified a few category of deals that are unlikely to rightsize even with another year or two of cankicking: Value-add deals financed with short-term debt in 2020–22, value-add deals owned by syndicators that lack the financial wherewithal to pay down loan balances or fund reserves in exchange for extensions, and construction loans in high-growth Sun Belt markets that are taking longer to lease up as a result of huge supply pipeline.
These have made up much of the distress seen in multifamily to date, which as stated, has been low. According to the National Multifamily Housing Council, citing FDIC data, the percentage of non-current multifamily loans doubled to 0.3% in 2023. By way of perspective, in the wake of the global financial crisis, the rate peaked at 4.7%, Yardi pointed out.
But it is possible that more distress could materialize, depending on how the capital markets play out over the next year. For example, Yardi says that if the 10-year Treasury yield falls to the low-4% range or less, transaction activity will resume, borrowers will refinance loans more easily and much distress will be avoided.
Conversely, if rates rise – a scenario that is a possibility albeit distantly – distress might start to coalesce sooner rather than later. "A likely third scenario is that rates bounce around in their current range, which keeps market players waiting and hoping for change through the rest of the year and doesn't do anything to solve the dilemma of how to transact in a much higher rate environment," Yardi wrote. In that scenario, market activity will remain slow and we could still be facing many of the same questions heading into 2025.
For borrowers able to extend their loans, the news is good – there are plenty of sources of debt available with the GSEs, debt funds, life companies and CMBS all actively seeking to lend. Yardi reports that borrowers are seeking fixed-rate loans with five-year terms and prepayable options. "Variable rate loans are prohibitively expensive, as the secured overnight financing rate (SOFR) remains above 5% and buying interest rate caps is extremely expensive," it wrote. "So borrowers want to lock in a fixed rate while maintaining flexibility to refinance when rates recede."
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
