Capitalizing on Multifamily Maturity Risk

At present, approximately 42% of all commercial real estate loans maturing in 2024-2025 are backed by multifamily assets, totaling around $500 billion. A portion of these maturing loans are being held by non government-sponsored enterprises such as banks, life insurance companies, commercial debt-backed securities and debt funds. Slowing fundamentals within this space, combined with substantial challenges for refinancing certain loans in a higher current interest rate environment, may prove difficult for certain investments initially underwritten with narrow margins that have not adequately added value by way of adequate market rate rent increases and/or selective capital improvements to elevate overall net operating income.

Prior to the pandemic, most multifamily loans were originated with 7-10 year terms. The current 10-year Treasury rate of 4.0% as of year end 2023 is substantially higher that the average rate of 2.4% observed from 2014-2018. Back in December, the Federal Reserve decided for the third consecutive time to keep federal fund rates unchanged. And although markets expect to see some cuts throughout 2024, the absolute direction of rates remains somewhat speculative for the near term.

At present, overall multifamily property prices have fallen 14% from their historic high in July 2022. Future prices are being constrained by the compressed capital rate spread, or difference between cap rates and the 10-year Treasury. For example, the average cap rate spread has been 310 bps going back to 2001, but currently sits at only 120 bps as of the end of 2023. Current data also shows a general trend toward increasing annual property expenses, which typically reduce net operating income (NOI) and add pressure to Debt Service Coverage Ratios (DSCR). A resulting lower Loan To Value (LTV) may present some challenges to property owners where additional cash is needed to complete a refinance.

We will continue to monitor the market and identify specific opportunities for timely multifamily acquisition in the Midwest as the multifamily market continues to develop.