While much of the concern over commercial real estate distress has focused on the office market, a new report shows multifamily loans are the ones that saw the biggest spike in losses last year.
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The loss rate for apartment loans last year reached 16%, up from around 5% in the prior two years, according to MSCI’s U.S. Capital Trends report released Wednesday.
The rate of losses is still less than half of what it was during 2009, when lenders were taking losses on 37% of apartment loans, but MSCI said the “upward momentum is concerning.”
While it experienced the sharpest increase last year, the apartment sector's loss rate is still below that of office and retail, which have remained above 20% for most of the last decade.
The year ahead looks like it will only bring more distress to multifamily.
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Apartment buildings back 32% of all commercial real estate loans coming due this year, with those loans totaling $194B, according to MSCI's report. The second most exposed asset class is office, making up 20% of loans coming due in 2024.
One-third of all loans maturing this year were originated in 2021, the most of any year, according to MSCI. The report says that these loans were placed at a time of “record high prices and record low interest rates.” But now with commercial values plummeting and interest rates high, many borrowers will look to extend their loans.
"Not every lender will be willing or able to extend however, making this vintage of loans a prime target for those looking for opportunities in the dislocation," the report says.
Some borrowers who took out loans on apartment buildings in 2021 and early 2022 have already begun to suffer distress.
Applesway Investment Group in August defaulted on a $65.2M loan it received in December 2021 for a Houston apartment complex. Also in the Houston area, an apartment complex went into foreclosure in November after the owner defaulted on a $288M loan that was originated in February 2022, before interest rates began to rise.
This type of distress has become a top focus of investors, with asset management giants raising opportunistic real estate funds, and with roughly $260B in total capital targeting North American real estate, according to Preqin. Investors told Bisnow in November there could be "generational opportunities" to take advantage of distress in the apartment sector.
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As apartment owners face debt challenges, many also face declining incomes, as a surge of pandemic-driven multifamily deliveries led rent prices to fall 1.2% quarter-over-quarter in the fourth quarter of 2023, according to CBRE. Values are also dropping, with MSCI's report finding apartment prices in February were down 8.9% year-over-year, second only to the office sector.
The rate of CRE loan delinquencies has remained relatively low compared to the Great Recession, but it did tick up from 0.6% in Q3 2022 to 1.2% last quarter, according to MSCI.
In January, Fitch Ratings predicted defaults on CMBS loans tied to apartment buildings would double in 2024, reaching $1.3B in delinquencies and exceeding their pandemic-era peak.
Overall, MSCI estimates that $870B of mortgages tied to assets in its commercial real estate database could come due in 2024. That includes $270M of loans that were due last year but were likely extended, as no refinancing or sale occurred.
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