Commercial real estate minds have been fixated on the office market crash in the aftermath of the pandemic lockdowns, and justifiably so. Remote work has relegated large swaths of conventional workspace irrelevant and left millions of square feet of office space vacant. There is much less fear surrounding the multifamily sector, which thrived during the pandemic. Yet that is changing.
Skyrocketing multifamily rental growth and cheap debt in 2021 and 2022 fueled a wave of investment in which buyers overpaid for properties. The reasoning behind buying properties with high price tags and minuscule cap rates was the idea that continued rent growth would eventually lead to a handsome payoff. Those assumptions did not consider the dramatic rise in interest rates over the past year and what that might do to the economy.
Now multifamily experts are bracing for distress as borrowers in these so-called negative-leverage deals, in which the cost of debt exceeds the investor’s initial yield on an acquisition, could face difficulties, and not only in making mortgage payments. Refinancing or selling the assets in a higher interest rate environment is also difficult, casting uncertainty over property values. That’s because to fund the transactions, borrowers often tapped short-term floating-rate bridge loans, the bulk of which begin maturing in the coming months. “If you did a deal with 80 percent leverage, the value today could be at a point where it’s below the loan balance,” suggested Kelli Carhart, an executive managing director and leader of U.S. multifamily capital markets at CBRE.
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