‘Starting To See The Cracks Emerge’: Why 2025 Could Be A Big Year In The Distressed Multifamily Market

Houston multifamily investors are ready to put “extend and pretend” behind them. 

Distressed sales and foreclosures are taking far longer to play out than anyone expected, FCP Vice President of Multifamily Acquisitions Cole Kellogg said at the Houston Bisnow Multifamily Annual Conference on Wednesday. 

But tons of money remains on the sidelines as interest rates fall and lenders tire of modifying loans to manage distress. So investors are preparing for action, hoping to finally capitalize on the pain and land on the winning side of the market correction, panelists said at the event at The Westin Houston Memorial City.

“We really think 2025 will be the opportunity where a lot of this high-leverage, workforce housing assets that were purchased in ’21, ’22, really start to hit the market,” Kellogg said. “Frankly, we’re excited for that investment opportunity.” 

Multifamily had a “honeymoon period” for about a decade before interest rates began to rise in 2022, panelists said. The cost of capital was extremely low, and many overpaid for properties, said Terri Clifton, managing partner at Better World Properties. 

Clifton recalled once having to attend a Zoom interview to become the final candidate for a property purchase because so many buyers were interested. Then property values lowered by 25% to 30%, the cost of taxes and insurance spiked and floating rate debt got out of control, thinning out the buying pool and landing some investors in hot water. 

“Now, people who purchased some of those deals are in trouble, and they're looking to get out,” Clifton said.

Houston multifamily players initially thought “survive till ‘25,” another popular CRE mantra, wouldn’t apply to them. Given factors like Houston having the highest percentage of criticized multifamily loans in the nation this summer, many expected a wave of distress and forced sales this year. 

“We’re certainly starting to see the cracks emerge there, but I’ve personally been very surprised that it’s not as widespread as I expected,” said Sameer Walvekar, senior managing director for Urban Genesis. “The lenders are working out the loan mod with the sponsors, and they’re kicking the can down the road.” 

But lenders and borrowers are finally coming to an impasse, Kellogg said.

Better World Properties is already finding opportunities in the distress. Over the past two months, the company has taken over management of four foreclosed properties, Clifton said. Better World is repositioning them to take to market for sale within a year and a half.

There will be winners and losers throughout this market correction, she added.

Some syndicators put off accepting reality, so they raised more capital from investors to float their properties. A number of them ran up debt by not paying maintenance and other bills, and stressed out on-site staff, leading to turnover, Clifton said.

“We purchased something four, five months ago and got it at a killer deal,” she said. “That’s because the seller, his loan was coming due and he was forced to sell. You’re going to see a lot of that happening here over the next year.” 

Some prices will self-correct and drop, leaving opportunities for investors to profit on purchases, Clifton said.

“We're actually getting ready to take one from a lender and bring it in-house, which means the poor investors lost all their equity,” she said. “But my new investment group is going to win.”

It helps that multifamily deals are now much better vetted, Impex Capital Group President and CEO Ash Shah said, pointing to a dramatic change in mindset since the honeymoon period ended.

“It’s not just somebody putting some underwriting on a spreadsheet and saying ‘Oh, there’s going to be amazing returns,’” Shah said. “Investors, lenders, everyone has become more savvy, more careful, more sophisticated.” 

He’s finding more institutional equity coming into the picture and wanting a larger slice of the pie as a result of the more conservative lending approach.

For himself, Shah is asset class and location agnostic when finding deals. 

“The most important for us is our [joint venture] partners, our sponsors, their experience,” he said. “Have they gone through a couple of downturns? What exactly is the business plan, their vision and so on?” 

It is possible to find diamonds in the rough all over the nation, he said, but the Sun Belt and Texas are at an advantage due to population growth.

Houston’s multifamily market has seen better fundamentals than other Texas cities due to its smaller supply wave, Walvekar said. Houston’s year-over-year rent growth was negative 1.5% in May, compared to negative 8.3% in Austin, according to MRI ApartmentData.

This leaves opportunity for developers as well, and Urban Genesis is seeing 30 to 40 new units lease every month, Walvekar said.

“Given the lack of supply here in Houston, our velocities tend to be stronger,” he said. “Our rents are in pro forma or above pro forma.”

That trend should hold for projects that deliver over the next 24 months since high construction and capital costs had limited the number of new projects getting off the ground, reducing supply, Walvekar said.

Money is still out there capitalizing new development, but it’s from fewer and different sources than two years ago, he said.

“The most recent developments that we've capitalized and we started construction on are really focused on … high-net-worth individuals and family offices that have a long-term lens and can look beyond the noise of supply and concern over the next two or three years,” Walvekar said.

Investors and developers can be successful in the multifamily market if they buy correctly and don’t over-leverage their deals, Clifton said.  

“If you're smart, you do your underwriting correctly and you prepare and plan for that stability, you're going to win in any market,” she said.