Multifamily Loans Maturities
Many multifamily loans set to mature in 2024 were taken out in a much lower interest-rate and apartments were enjoying double-digit-percentage rent gains annually.
The U.S. multifamily loans have significantly slowed down in some markets, since its peak during Covid-19 pandemic, making people worry about the billions in debt tied to the sector.
An estimated $669 billion in multifamily loans are set to mature between 2024 and 2026, according to Newmark Group Inc. (Nasdaq: NMRK). Many of these loans were underwritten in a much lower interest-rate environment and during a period when apartments rents were experiencing double-digit annual gains.
Lending for multifamily properties has slowed down, unlike other commercial real estate sectors. In the first quarter, multifamily debt originations dropped to the lowest level since 2015, according to Newmark.
Newmark executives weren’t unavailable for a phone interview by deadline to discuss the multifamily financing market. However, in an email, Sharon Karaffa, president of multifamily debt and structured finance for Newmark’s multifamily capital markets division, mentioned that although there are fewer active lenders today compared to 2021 and 2022, creative financing option is available.
“This year, there’s been more multifamily financing through commercial mortgage-backed securities showing how tough it is to find financing options compared to past years. Debt funds are active again, life companies are still active, and Fannie Mae and Freddie Mac continue to provide liquidity in all markets every day,” Karaffa said.
However, she pointed out that a significant portion of the debt maturing over the next three years is operating below a 1.25 debt-service coverage ratio, which a standard benchmark for many lenders indicating that a property’s net operating income can cover its debt service by 125%. Much of this debt originated with shorter-term, variable-rate financing was underwritten to rent growth projection that was higher than what has been realized.
Other commercial real estate sectors are seeing a split in which loans and properties are struggling the most. For instance, in the office properties, for example, it’s mainly the old, outdated office buildings that tenants don’t want anymore that are having the biggest issues today, including financing.
In multifamily, the bifurcation is less about specificity to subtype or obsolescence and more about the nature of the existing debt, According to Karaffa. She mentioned that Fannie Mae and Freddie Mac portfolios are still doing great. But short-term, variable-rate loans underwritten to projected rent increases will face greater distress. As those properties have not yet achieved the anticipated growth and will encounter higher interest rates upon refinancing compared to the original loan terms.
The huge amount of new multifamily construction is a big reason for the market slowdown, especially in areas like the Sun Belt, where some markets are seeing a rental drop. This situation has raised concerns about whether borrowers who obtained short-term construction loans during a different market environment will now face difficulties in securing permanent debt.
Mike Wolfson, Newmark’s managing director of multifamily capital markets research, said in an email that well-leased and well-located properties, especially those with experienced sponsors, shouldn’t encounter difficulties in obtaining permanent debt.
According to Wolfson, higher rates are making borrowers choose shorter, five- or seven-year terms instead of the usual 10-plus-year loans.
In May, the multifamily CMBS delinquency rate was 1.7% which is modest compared to the delinquency rates for office properties at 6.94%, lodging’s 6.22% and retail at 5.94%, according to Trepp Inc. However, the multifamily delinquency rate has risen slightly from 1.46% a year ago.
Even with the current difficulties, Wolfson said multifamily properties are still popular choice for both lenders and investors.
“Rental demand remains strong as apartments continue to be more economical than homeownership,” he said. “We expect Fannie Mae and Freddie Mac to provide the necessary liquidity to the market, and we also anticipated that debt funds, life insurance companies and CMBS lenders will continue to be active in multifamily lending.”
Lenders are closely monitoring new supply and absorption, Wolfson said, but Newmark’s perspective remains optimistic. Despite short-term challenges, markets with new rental supplies coming Online are poised for growth due to strong demographic trends.
Multifamily investment sales hit $20.6 billion in the first quarter, reflecting a 25.3% annual decrease, according to Newmark. On a rolling four-quarter basis, sales volume declined to $113 billion, marking the lowest point since the fourth quarter of 2014 and a 42.2% drop below the long-term average.
“Origination volume for all multifamily has slowed, in part, because sales activity has dropped to almost decade lows over the past four-quarters,” Wolfson said.
