Wall Of Multifamily Maturities Dead Ahead: $4B In October Alone

A tall wall of hard-to-refinance debt in the formerly high-flying and still in-demand multifamily sector is coming in October and November, according to a new report by Gray Capital.

In October alone, well over $4B in commercial mortgage-backed securities loans associated with multifamily properties will come due, and November's total will be nearly $4B, multifamily investor Gray Capital reports, citing CoStar data. Those totals don't count non-CMBS loans, so the actual total will be even higher than those figures.

As close as that is, the consequences of hitting the wall are still highly uncertain, Gray Capital CEO Spencer Gray told Bisnow.

“The question is, will the volume of distress exceed the point at which lenders have some flexibility and can choose to extend and pretend?" Gray said. "Are their balance sheets going to be so upside down that they're going to be forced to make some decisions and start foreclosing?”

After the October and November peak, there will be a trough of maturities in early 2024, often less than $1B each month, but another wall looms for late that year, though not quite as high as Q4 2023.

For high-quality assets in good locations, and for the operator that has a good relationship with the lender, there is a reasonable chance that something will be worked out, Gray said.

“A marginal asset, marginal borrower may not have nearly as many choices, if any,” he said.

The expected turmoil for multifamily stands in stark contrast to its performance in 2021 and its position as an in-demand property type in a country experiencing a years-long housing shortage.

The fourth-quarter 2023 wall is the legacy of a peak in multifamily investment sales that happened exactly two years earlier. Interest rates were still historically low then, while demand for apartments, and the rents they commanded, were headed for the sky.

A lot of buyers were inspired by fear of missing out, Gray said. Investment sales in the property type peaked at over $115B in Q4 2021.

Now that interest rates are higher than they have been in recent memory, many of those borrowers face a distasteful choice: sell their properties soon, or try to refinance and be forced to bring more cash to the table to avoid default or foreclosure, Gray said.

Few predict that interest rates will decline any this year, thus incentivizing multifamily borrowers with maturing bridge loans or floating-rate loans to sell their properties, though like any forced sale, there will be downward pressure on prices.

The stagnant investment sales market presents challenges of its own in selling, as price discovery is uncertain. The gap between buyers and sellers is estimated to be between 10% and 20%, depending on the market, according to Gray.

Refinancing might not be possible, especially for lower-quality assets, or assets that are strong but somehow less than perfect. But even when it is doable, owners looking to refi their short-term debt will probably need to bring an additional 15% to 50% of original equity contribution, depending on net operating income growth and market, Gray said.

Ironically, the wall is coming at a time when demand for apartment is still strong and rents, while leveling off or coming down in some markets, are still historically high.

“It's a complete financial quagmire,” Gray said. “Demand for housing is surprisingly strong now, but the financial realities of how these assets were financed just ahead of a sudden and rapid rise in interest rates has created this situation.”