A major ratings agency is predicting that the U.S. multifamily market is on the verge of a surge in loan defaults.

Apartment delinquencies for CMBS loans could hit $1.3B this year, exceeding the losses seen during the height of the pandemic, Multifamily Dive reported, citing a Fitch Ratings report.

Apartment landlords are experiencing headwinds due to a record onslaught of new supply, with 900,000 units under construction and more than 440,000 set to deliver this year in the U.S., according to CBRE. That influx of inventory is diminishing revenue growth and escalating expenses that are hitting cash flow, according to the Fitch report. The net result is more apartment owners will be underwater on their loans.

The delinquency rate on multifamily CMBS loans has already ticked up, rising to 2.6% in December from 1.6% six months prior, according to Trepp.

The once high-flying U.S. apartment market is feeling the impact of new supply. The vacancy rate in the U.S. dropped year-over-year in December a full percentage point to just under 95%, according to Yardi Matrix data. Rents also dropped $6 in that period, leaving the average rent at more than $1,700 per month as of November.

But some experts are predicting that landlords may see some relief as developers rapidly cool down on new apartment projects and the Federal Reserve makes projected interest rate cuts later this year, according to CBRE.

“We expect starts will fall by 45% in 2024 from their pre-pandemic average and by 70% from their 2022 peak,” CBRE Senior Research Director Matthew Vance and Research Associate Director Travis Deese wrote in the report. “This decline in starts means that new deliveries will be reduced to less than half the current level by 2026, paving the way for a strong recovery in both occupancy and rent growth.”