Multifamily Distress Leaps 185% As Delinquencies Pile Up
Distress rates in the CMBS market continued to climb in June, with the number of troubled multifamily loans nearly tripling since the start of the year.
Roughly 7.4% of multifamily CMBS loans were delinquent or in special servicing at the end of last month, according to a report from securitized debt tracking firm CRED iQ, up from about 3% at the start of the year.
The multifamily market is still outperforming the total CMBS space, which has an 8.6% distress rate. But the explosion in delinquencies through the first half of the year has brought the multifamily sector closer to the levels seen in the headline-grabbing office space, where the distress rate sits at 11.7%.
Special servicing rates among all CMBS debt were relatively flat at 8.1% in June, while delinquencies grew half a percentage point to 6.3%. Real estate’s top performing sectors remain self storage, with a 0.1% delinquency rate, and industrial at 1%.
Apartment building owners have been squeezed by growing operating and insurance costs, just as rent growth stalls across the U.S. and a wave of new inventory brings prices down in markets where rents shot up during the pandemic.
The fixed-rate, long-term nature of most CMBS debt helped insulate apartment owners from rising interest rates. But the owners of maturing debt are being tested by the Federal Reserve’s tight monetary policy, with higher debt payments weighing down balance sheets.
There's $113B in multifamily CMBS debt set to mature this year and next, 35% of the total volume of maturing debt, according to CRED iQ. The $42.3B in office debt set to mature over the same period is the next-largest sector.
Fitch has flagged the impending maturities as a potential pain point. Morningstar has also said in a report that the multifamily sector is “especially wobbly.” It cited the sector’s large share of maturing debt during the next two years as an issue, saying in August 2023 that developers “are just now about to enter the gauntlet of higher rates.”
That pandemic-era borrowing spree was fueled by small and midsized regional banks, the report notes, which have largely pulled out of the market in the near term, leaving borrowers with fewer refinancing options.
Peter Sotoloff, a former managing partner at Mack Real Estate Credit Strategies and former head of U.S. originations at The Blackstone Group, described the impending wall of maturities as a “hydrogen bomb scenario” in a LinkedIn post.
Well-funded sponsors can bring their own equity to the table to offset limited debt availability. Blackstone, for example, has been working on a $550M CMBS refinancing package of 10 apartment complexes that includes an $83M cash infusion.
Until interest rates fall, landlords without equity on hand to bring down their overall debt are going to continue to be squeezed by borrowing costs as their debt matures.
The loss rate for CMBS apartment loans reached 16% in 2023, according to MSCI, up from around 5% in the prior two years.
