What's Up Wednesday: Multifamily Owners Squeezed as Values Drop 20%
It’s not only office building owners who are finding themselves backed into a corner by loans coming due, plunging valuations, the rising cost of debt and a lending window for refinancing that’s been slammed shut.
Multifamily owners also are feeling the squeeze. As a pending wave of $1.5T in CRE loan maturities crests in the next three years—Trepp says a record $152B in CMBS backed by rental apartment buildings will expire in 2023, $940B over the next five years—many may have no option but to hand over the keys to the property.
Green Street is estimating that apartment building values are down more than 20% from their peak. At the same time, rent growth is slowing, which means some properties with large, floating-rate mortgages no longer generate enough profits to make debt payments.
Investors who binged on multifamily properties before interest rates started rising, acting on the assumption—let’s call it a risky bet—that rent growth was a given are paying the price for that exuberance.
According to a Wall Street Journal report, a Houston apartment owner who defaulted on a multifamily portfolio encompassing 3,200 units could be the shape of things to come in the multifamily sector.
In what WSJ says is “the latest sign that surging interest rates are beginning to upend the multitrillion-dollar rental-housing market,” Applesway Investment Group lost four Houston multifamily campuses to foreclosure last week.
Applesway defaulted on $230M in loans it used to acquire the portfolio of apartment buildings, which was part of Applesway’s acquisition binge on Texas properties during the pandemic.
Arbor Realty Trust, a publicly traded mortgage company, foreclosed on the properties and sold them to New York-based investment firm Fundamental Partners for an undisclosed price.
According to WSJ, Applesway was typical of CRE investors who saw big profits when they acquired moderately priced buildings with plans to raise rents after making certain improvements.
Applesway CEO Jay Gajavelli said in a video posted online that he could double his investors’ money by fixing up a lower-income apartment complex located outside central Houston, with a plan to raise rents and to charge tenants extra fees for amenities.
“The property value will go up down the road,” Gajavelli said in the video, WSJ reported.
Most of Applesway’s loans originated in 2021 before the Fed began its campaign of interest rate hikes. According to data from Trepp, the rate on a loan for one of Applesway’s properties has risen from 3.4% to 8%. Trepp also reported that two of Appleway’s properties were leveraged with 80% debt.
Earlier this year, San Francisco-based Veritas defaulted on a $450M loan backed by rent-controlled apartment buildings.
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