Why New D.C. Multifamily Buildings Are Falling Into Financial Distress

In the early years of the pandemic, multifamily construction was booming. Money was cheap and plentiful, and developers were gobbling it up, building apartments and condos at record speed, leaning into an asset class that — especially compared to office — looked like a golden goose. 

But the developers of those new buildings, who were riding high on low interest rates and liquidity being pushed into the market, are now feeling the effects of a quick and dramatic reversal.

“Most of the new projects are in hot water right now,” Virginia Investment Properties CEO Srinivas Chavali said. “They're in big trouble.” 

Chavali makes a business out of buying distressed loans and properties in the D.C. metro, and he’s seen a dramatic shift in the amount of new multifamily distress. 

At the beginning of the year, Chavali purchased a distressed loan on a 110-unit multifamily building in NoMa that just opened in 2023. The Lanes, developed by Ranger Properties, was delayed during Covid, he said, and by the time the loan came due, it wasn’t stabilized yet. 

He sold the loan at a foreclosure auction to HH Fund — a Silver Spring-based company that focuses on student living — in May for $38.3M.

The Lanes is one of several new multifamily buildings that have gone into foreclosure over the last few months. But those are just the tip of the iceberg, experts say. The distress is manifesting itself in a number of ways, from banks selling off loans they don't want to carry on their books, to forced sales, to owners searching out rescue capital to fill the gaps. 

“There is a very hidden, significantly growing challenge,” Acumen Cos. Investment Committee Chair AZ Abiud said. “It's very hidden, you're not seeing it. Lenders want to control it, want to control a narrative, so it doesn't create panic.”

In D.C., there was a surge of new development during 2020 and 2021, especially in newly hot neighborhoods like NoMa and Navy Yard, with thousands of units delivering in the years following: more than 6,700 in 2022, 5,300 in 2023 and another 9,100 expected to deliver this year, according to WDCEP’s annual reports.

Now, three years down the road, construction loans that developers were able to land at a 3% or 3.5% interest rate are reaching their maturity. Many of those projects were delayed by supply chain issues, and as owners work to lease them up amid a glut of new supply, they are having a difficult time refinancing.

CMBS loans on apartment buildings nationwide have seen skyrocketing distress over the last six months. A CRED iQ report last month showed distress rates are up 185% since the start of the year.

The financial troubles are coming despite the underlying multifamily market remaining relatively stable: Class-A rents across the D.C. Metro area increased by 3.5% over the past year, according to Transwestern’s second-quarter report. 

“While the asset isn’t distressed, the capital stack is,” Greysteel Senior Director TC Cosby said. “In D.C., rents are fine, things are going well, it’s not really that the asset isn’t a clean and good asset. It’s more a function of the capital stack needs to be reimagined, maybe reset at a lower basis. That’s the dynamic going on in D.C., but also across the country.”

A growing number of owners are finding larger and more pressing gaps in their capital stacks after interest rates more than doubled, then stayed high, as rent growth began to flatten.

“It provides an opportunity for new groups to step in and provide rescue capital,” Cosby said.

That sort of financing doesn't come cheap. Nectar, which launched in 2021 and provides gap financing for small and medium-sized apartment and condo owners, offers interest rates in the mid to high teens, Chief of Staff Walker Skaar said.

But it’s an option to get cash fast. And with banks pulling back on lending, these alternative capital sources are increasingly the only choice owners may have to avoid foreclosure. 

“There's a lot of deals that are not performing, that are underwater, a lot of properties that aren't performing up to what the lenders need,” Skaar said. 

Skaar said Nectar won’t lend to owners of properties with problems that can’t be solved with a few-million-dollar bridge. And since it’s getting more requests for capital than ever, the company can be pickier about the loans it gives out. 

For many owners, though, the problem is more existential, leading them down a path to foreclosure.

Last week, Forbright Bank filed a notice of a foreclosure auction at the 36-unit The Arbor at Takoma, which Neighborhood Development Co. finished construction on this spring. 

The project, across from the Takoma Metro station, was built and marketed as for-sale condominiums, but NDC CEO Adrian Washington told Bisnow that the market softened and sales didn't materialize as he hoped. Because of that, he decided to deliver the building vacant and market it for sale as rental apartments — forgoing the District's Tenant Opportunity to Purchase Act.

NDC tapped Marcus & Millichap to find a buyer, and Washington said Forbright has been pressuring him to sell the building faster. He added that he believes he will be able to sell the building before an auction takes place.

He declined to comment on the foreclosure notice, but he said NDC still believes in the project and its premise of providing mixed-income homeownership opportunities along with neighborhood-serving retail.

“Despite the current market challenges, we remain steadfast in our belief that this vision is achievable,” Washington wrote in an email. “We are engaged in what we believe to be cooperative discussions with Forbright and remain hopeful of reaching an amicable agreement with them to preserve this vital important community resource.”

Berkadia Senior Director of Investment Sales Yalda Ghamarian said many owners staring down maturing loans are likely to look to sell their buildings because rates on refinancing loans are so much higher than what they have been paying.

“Because the sale environment is alive and well in the Mid-Atlantic, a good portion of those owners are deciding to sell because they can get out and do OK,” she said.

Pivoting from condos to apartments is another way some owners are trying to shift strategies amid higher interest rates, but even that isn’t a silver bullet.

“A lot of them that are built originally as condo — it doesn't necessarily need to be high rise — those buildings, when interest rates came up at 7%, people are unable to buy, so they are unable to pay that 7% mortgage and buy those condos down, so they had to be converted into multifamily,” Abiud said. “But that fundamental doesn't work anymore.”

Urban Investment Partners, Kadida Development, Alliance Development and United Investment developed the Tribeca at NoMa, a 13-story, 99-unit building just south of New York Avenue in Northeast, as condos. But with urban condos falling out of favor during the pandemic amid a flight to space in the suburbs, the developers pivoted from condos to rentals upon delivery in 2021.

They refinanced the building the following year, but the loan was delinquent for seven months, according to Morningstar Credit, before it was sold at a foreclosure auction in June. 

MF1 Capital purchased the property for $29.5M, according to records filed with the D.C. Recorder of Deeds. The loan has since been paid off, according to Morningstar. 

Some projects going to auction aren't even finished, with their loans coming due before developers have a chance to complete construction and lease up their units. 

Bethesda-based Velocity Property Management was in the middle of constructing a four-story, 31-unit apartment building in Cleveland Park when it was foreclosed on and sold at auction last month. 

The Ella was one of a pair of multifamily buildings, along with a public plaza, Velocity had planned adjacent to the neighborhood's main retail stretch on Connecticut Avenue. 

With $13.6M left on its loan, the half-finished property was sold at a July 25 auction, run by Alex Cooper Auctioneers, for $5.1M. The deed hasn’t yet been filed with the D.C. Recorder of Deeds.

Velocity Property Management Managing Director Phil Kang declined to comment through a spokesperson.

A number of investors have been scouring the market looking to take advantage of the distress. 

Chavali, after foreclosing on and selling The Lanes, said he is looking to invest his return into his next acquisition. He said he knows of at least a dozen foreclosures or distressed notes up for grabs in the region right now, mostly in D.C. proper. 

Abiud’s Acumen Cos. is also closely tracking multifamily distress and looking for investment opportunities. His firm developed a software that flags every time a property is assigned to a substitute trustee — a precursor to it being foreclosed. 

“We are chasing every pre-foreclosure that's coming out,” Abiud said, “We have a list of them, hundreds of them, on a regular basis.”

This spring, his firm launched a $450M fund to take advantage of the distress and invest in properties near universities that are or could be transformed into student housing.

At the auction for The Lanes in Union Market this spring, Acumen bid but lost out to HH Fund, Abiud said. Still, it has found a way to be an investor in the property. When HH Fund announced it was raising equity for the purchase, Acumen jumped on board. 

“If there is an opportunity, it is right now,” Abiud said. “It's either happening right now as we speak, you're taking advantage of it, or you've been taking advantage of it.”