Multifamily Distress Could Head for 'Real Estate Armageddon'

Lynd Group weighs in with GlobeSt.

The Lynd Group has been expanding its footprint in distressed situations in multifamily despite the challenges within the industry.

David Lynd, chief executive officer of the real estate developer and manager, told GlobeSt that distress in multifamily is in a turbulent place right now. He cited a recent meeting he had with an unidentified larger institution, which feared the sector was heading for “real estate armageddon.”

David Lynd noted that the erosion of expenses, combined with high interest rates, has been troublesome.

“The problem is values are down and now rents are starting to decline to go flat,” he said.

“So they’re not keeping pace with the expenses. And then you have interest rates on top of it. So it’s a perfect storm. That’s just destroying values out there. So if you have a loan coming due anywhere, the value of the asset is just not what it was yesterday.”

The markets getting hit the worst in the distressed sector are the ones that “over-built because of potential demand,” according to  Lynd. Namely, he listed Austin, Texas, which he said has 40,000 units getting delivered over the next couple of years.

“They have occuppancies falling, rents are falling, because all those new units are coming online,” Lynd said.

“And on top of it, population growth didn’t keep up with what they thought it would be. So in Sunbelt markets, where a lot of units were delivered, and because they were winners during the pandemic, those margins built off the expected growth, and then the growth slowed down.

Now they have a bunch of units demanding that they’re delivering the demand is lower than what they thought.”

Lynd’s strategic partnerships 

But that’s where Lynd is coming in with strategic partnerships. Most recently it teamed up with Declaration Partners and the two firms will pour capital into workout and distressed circumstances. The move will mostly involve multifamily assets, according to Lynd.

Both Lynd and Declaration are currently advising 23,000 units in the country on several portfolios.

“As we enter a phase of significant change in the real estate landscape, where adaptability and agility will likely be essential, we saw the importance of aligning ourselves with experienced partners who share our vision and are well-positioned to capitalize on emerging opportunities,” Lynd said in a statement.

“We are confident that our new partnership achieves this goal, and we look forward to leveraging our combined strengths to navigate the dynamic market ahead.”

Ron Dalal, partner at Declaration Partners noted that Lynd’s two-and-a-half decade experience in “sorting out complex situations,” which includes purchasing and turning around distressed assets, was a driving reason on why it decided to collaborate with Lynd.

The partnership with Declaration follows more recent activity from Lynd’s. One of them was striking a joint venture with an undisclosed Houston-headquartered apartment investment company. The JV will work on evaluating and supporting a 2,600-unit portfolio. Plus, Lynd confirmed that it has been retained to advise a 10,000-unit portfolio in the northeast, as well as a combined 2,000 units in the South Central, and Central Louisiana.

Outlook and goals

But overall, David Lynd sees a “very rough couple of years” for the distressed mutltifamily industry. While he said there are opportunities available, he admits that the company needs to be “very selective” about them going forward.

That said, he’s a little more bullish on apartments because housing has become more unaffordable with high interest rates and refers to the U.S. as a ”renter nation.”

“I think we’re gonna go through rents, or you’re gonna be in another bull market, again, where rents are going up, (and) occupancies are going up,” David Lynd said.

“Because once all this new supply is delivered, there’s going to be a gap in there where there’s no supply delivered. It takes two to three years of execution to deliver an apartment building.”

He also projected that once deliveries start to wane, in combination with lower interest rates, there will be a “five-year period of increased rents and occupancies.”

One of Lynd’s goals is to avoid foreclosures, while also helping the lender keep losses on all assets at a minimum. The company helps the buyers and lenders work out issues.

Since the recession, Lynd said it has bought over $1 billion worth of distressed notes, secured by 40 properties.  These required foreclosures, bankruptcies, and restructuring.