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Carroll Raises Short-Term Lending Fund For Apartment Owners In Distress

An Atlanta-based real estate investment firm with more than $7B in assets under management is raising money to give apartment developers and investors underwater with expiring debt a lifeline.

Carroll CEO Patrick Carroll

Through its platform Carroll Credit, Carroll Organization has already raised $125M toward a $250M goal for short-term debt funding to multifamily developers and owners primarily in Sun Belt markets, CEO Patrick Carroll told Bisnow in an interview Tuesday.

The Federal Reserve’s series of rate hikes have put some apartment owners with loans expiring over the next 12 months in a bind to refinance given asset values are being called into question, he said, but he sees an opportunity to become a lender of last resort for apartment owners to weather the economy until values rebound.

“It just seems like there’s going to be such a need for it. I don’t think anybody [realizes] how big it’s going to be. Even construction loans are underwater,” Carroll said. 

Investors who a year ago could borrow against historically low interest rates have seen the Fed embark on its most aggressive rate hike campaign in a generation, causing credit markets to freeze and cap rates to rise to the point that they might be unable to satisfy their obligations, Carroll said. 

Apartment mortgage loan originations fell by 16% year-over-year in the third quarter, according to data released by the Mortgage Bankers Association, with loans for commercial mortgage-backed securities dropping 71%, insurance company loans falling by 42% and government-sponsored lenders like Freddie Mac and Fannie May declining by 15%.

“Increasing yields across investment alternatives — including the 10-Year Treasury yield more than doubling during the first nine months of the year — have shifted property financing and values, and it will take time for the market to fully absorb these changes,” MBA Head of Commercial Real Estate Research Jamie Woodwell said in a statement. “Volatility has been equally impactful, making the sizing of transactions extremely difficult. The result has been the first of what may be many quarters of depressed borrowing and lending activity.”

Carroll said Carroll Credit is looking to seize upon that depression. The firm has yet to issue a loan on its new platform, but Carroll said Carroll Credit is in due diligence on an initial batch of deals. 

Rising cap rates and slowing rent growth will likely be a driver of distress in multifamily, especially for those who purchased properties when cap rates were at record lows with short-term, floating-rate debt. In a cap rate survey released in August, CBRE found respondents expected cap rates to rise at least 25 basis points for apartment owners upon exiting their ownership. Average cap rates for apartments have risen from more than 4% at the end of last year to 6% today, Carroll said.

Carroll said he expects the floodgates of troubled loans to start opening at the beginning of 2023, with a window of up to three years for his firm to offer gap financing and lending.

“A lot of the pain has not been felt yet,” he said. "How much is out there? There’s a ton."

Carroll said the firm plans to work with senior lenders on loans to help borrowers through the downturn. That also positions Carroll to be able to take back the keys on Class-A and newly developed apartments if the worst comes to pass. 

“That’s also a big angle on this as well,” he said.

Carroll said multifamily investment markets are likely to rebound rapidly like they did following the Great Recession, especially given the amount of capital that is waiting on the sidelines for valuation certainty to return. More than $365B in capital with closed-end private real estate investors is searching for opportunities, according to CBRE

“As bad as things got, it bounced back really fast. I think something similar is going to happen here,” Carroll said. “This [fund] I didn’t want to spend too much time on fundraising because we didn’t want to miss the window.”

CORRECTION, NOV. 9, 12:45 P.M. ET Carroll Organization's lending platform is a new, separate entity called Carroll Credit. This story has been updated.