It seems like a good time to own multifamily properties.
For many landlords this is the case. Due to a housing shortage in much of the country and a period of high inflation, rents have skyrocketed in recent years.
But more and more rental properties are getting into financial difficulties, especially in the south and southwest. Only some have stopped making payments on their mortgages, but analysts fear that up to 20 percent of all home loans could be at risk of default.
Although rents rose sharply during the pandemic, the increase has stalled in recent months. Rents are beginning to fall in many parts of the country. Interest rates raised by the Federal Reserve to combat inflation have made mortgages significantly more expensive for homeowners. And while housing remains scarce in many places, developers may have built too much high-quality housing in cities that are no longer attracting as many renters as they did in 2021 and 2022, such as Houston and Tampa, Florida.
These problems have not yet escalated into a crisis because most owners of apartment buildings, also known as apartment buildings in the real estate industry, have not defaulted on their loan payments.
According to the Commercial Real Estate Finance Council, an industry association whose members include lenders and investors, only 1.7 percent of multifamily loans are at least 30 days past due, compared to about 7 percent of office loans and about 6 percent of hotel and retail loans.
But many industry associations, rating agencies and research institutes fear that many more housing loans could get into trouble. Multifamily loans make up a majority of the loans newly added to watch lists compiled by industry experts.
“Multi-family homes are not the focus at the moment, but they are on everyone’s lips,” said Lisa Pendergast, managing director of the Real Estate Council.
The home loan concerns add to a host of issues facing commercial real estate. Older office buildings are suffering from the shift to work from home. Hotels are doing poorly because people are taking fewer business trips. Malls have been losing ground to online shopping for years.
The problems with apartment buildings are diverse. In some cases, owners have difficulty filling the apartments and generating enough income. In others, apartments are full of paying tenants, but owners can’t raise rents fast enough to raise the funds needed to cover rising loan payments.
According to a list from data provider CRED iQ, almost one in five multifamily loans is at risk of defaulting on payments.
What worries analysts most is the fact that about a third of multifamily mortgages were issued with variable interest rates. Unlike typical fixed-rate mortgages, these loans have required increasing payments as interest rates have risen over the past two years.
ZMR Capital purchased the Reserve, a 982-unit building in Brandon, Florida, near Tampa, in early 2022. The mortgage on the property was packaged into bonds that were sold to investors. The property is more than 80 percent occupied, but interest payments have increased by more than 50 percent, or over $6 million. As a result, the building’s owner was unable to repay the mortgage due in April, according to CRED iQ’s analysis of loan servicing documents. ZMR Capital declined to comment.
OWC 182 Holdings, the owner of Oaks of Westchase in Houston, a 182-unit garden-style community comprised of 15 two-story buildings, has not made payments on its mortgage since April, largely due to high interest costs. according to CRED iQ. Representatives from OWC 182 could not be reached for comment.
“The rise in interest rates is causing the debt servicing costs of these properties to skyrocket,” said Mike Haas, managing director of CRED iQ.
But borrowers who have secured a fixed-rate mortgage can also face problems if they have to refinance their mortgage with loans that have significantly higher interest rates. About $250 billion in multifamily loans will come due this year, according to the Mortgage Bankers Association.
“With interest rates much higher and rents starting to fall on average nationwide, if you need to refinance a loan, you’re refinancing into a more expensive environment,” said Mark Silverman, partner and head of the CMBS Special Servicer Group at Locke Law Firm Lorde. “It’s harder to make these buildings profitable.”
While debt and credit challenges for office buildings are concentrated in buildings in major cities, particularly in the Northeast and West Coast, multifamily concerns are more concentrated in the Sun Belt.
As people increasingly moved to the South and Southwest during the pandemic, developers built apartment complexes to meet expected demand. But in recent months the number of people moving to these regions has fallen sharply, real estate analysts say.
In 19 major Sun Belt cities — including Miami, Atlanta, Phoenix and Austin, Texas — 120,000 new housing units became available in 2019 and were taken up by 110,000 renters, according to CoStar Group. Last year there were 216,000 new units in these markets, but demand fell to 95,000 tenants.
Additionally, as construction and labor costs rose during the pandemic, developers built more luxury apartment buildings in hopes of attracting tenants who could pay more. Now prices and rents for these buildings are falling, CoStar analysts say.
“The developers have just gotten so far out of control,” said Jay Lybik, national director of multifamily analytics at CoStar Group. “Everyone thought the demand we saw in 2021 would be what it would be going forward.”
That could be a big problem for investors like Tides Equities, a Los Angeles-based real estate investment firm that bet heavily on multifamily properties in the Sun Belt. Just a few years ago, Tides Equities owned homes worth around $2 billion. That number quickly grew to $6.5 billion. Now that rents and prices for these apartments are falling, the company is struggling to make loan payments and cover operating costs, according to CRED iQ.
Tides Equities executives did not respond to requests for comment.
However, multi-family homes are likely to be in a better financial position than, for example, offices. That’s because multifamily housing can be financed with loans from government-backed mortgage giants Fannie Mae and Freddie Mac, which Congress created to make housing more affordable.
“If regional banks and large investment banks decide not to do multifamily lending, Fannie and Freddie will simply get more of the business,” said Lonnie Hendry, chief product officer of Trepp, a commercial real estate data company. “It’s a resiliency that the other asset classes simply don’t have.”
Additionally, while offices are experiencing a major shift in work patterns, people still need housing, which should support the multifamily sector in the longer term, Mr. Hendry said.
Still, some industry experts expect a wave of residential defaults, which would exacerbate problems across the commercial real estate industry.
“There are a lot of really strong multifamily assets,” said Mr. Silverman of Locke Lorde, “but there will be collateral damage, and I don’t think it will be small.”
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2024-07-04 09:02:24
www.nytimes.com
