The First Wave for Multifamily – March 18, 2024
2024 has been widely viewed as the first wave of impending commercial real estate loan maturities, if not distress. Although much attention has been paid to the office sector in terms of its potential for loan defaults, multifamily will not be immune to these risks.
A major factor in the sector’s potential for distress is the sheer volume of loans coming due. The multifamily market has 58,533 properties with loans set to mature over the next five years, representing $525 billion of the total $1.1 trillion of loans currently backed by apartments, Yardi Matrix says in a new report.
Of the loans in the database, $61.8 billion are set to mature in 2024, with another $84.3 billion in 2025, $89.3 billion in 2026, $77.9 billion in 2027 and $107.3 billion in 2028.By percentage, 5.4% of the loans currently outstanding will mature by the end of this year, 12.8% by the end of 2025, 27.5% by the end of 2027 and 46.1% by the end of 2029.
Factors that will determine distress include interest rates, strategies around loan extensions, property fundamentals, regulatory issues and loan seasoning, according to Yardi Matrix.
“Multifamily originations peaked during years with record transaction volume, including 2021 (when $194.7 billion of loans were originated) and 2022 ($209.8 billion), as investor demand reached a high point during a time of strong fundamental performance and low interest rate,” Matrix analysts point out.
As the report observes, “Worries about rising loan defaults intensified when the Federal Reserve started raising interest rates in the spring of 2022. Years of zero short-term interest rates had pushed loan coupons to historically low levels, and many multifamily properties booked loans with coupons within the 3-4% range.
“However, loan coupons rose by 200-300 basis points or more after the Federal Reserve increased policy rates by 525-550 basis points over the next 18 months. Meanwhile, reflecting the higher capital costs, multifamily property values fell by 20-30% from the 2022 peak, and lenders tightened standards due to regulatory pressure, growing fears of a recession and weaker income growth.”
The result, according to the report, is that “many properties up for refinancing are qualifying for lower proceeds than they did when their existing loans were originated. Although multifamily loan defaults remain relatively low, they have risen slightly as lenders push maturities forward. The delinquency rate for GSE loans is roughly 0.4%, up from 0.1% before rates rose, while the multifamily CMBS delinquency rate was at 1.8% in February after falling as low as 1.0% in January 2022, according to Trepp and the CRE Finance Council.”
Metro areas with the largest volume of maturities include Atlanta ($34.9 billion), Dallas ($26.6 billion), Denver ($22.9 billion), Houston ($20.8 billion), New York ($19.9 billion) and Chicago ($18.8 billion). Markets with the highest percentage of loans coming due through the end of 2029 include Atlanta (65.9%), Denver (56.9%), Nashville (56.2%), Las Vegas (55.9%), Houston (53.6%) and Chicago (53.2%).
Fundamentals may also play a part in determining where loan trouble arises. Markets with a high percentage of loans maturing over the short term and recent negative rent growth include Atlanta, Houston, Raleigh–Durham, Orlando and Austin, Yardi Matrix says. In addition, markets with strong deliveries and a high percentage of units under construction include Austin, Charlotte, Raleigh-Durham, Denver, Orlando and Miami.