While the multifamily market has been the belle of the ball for the past few years, those investors who paid up for properties at the peak of the market are now finding themselves in hot water.

A wall of $8B in multifamily mortgage-backed securities is set to mature this October and November, raising concerns that the glut of maturing debt could lead to a wave of defaults for the multifamily sector that for years has ridden an undercurrent of improving fundamentals and renter demand.

That distress could lead to opportunities for investors to buy properties out of bankruptcy, but some panelists at last week's Bisnow Southeast Multifamily Summit said lenders are more likely to work with borrowers rather than take distressed assets onto their balance sheets.

“Nobody wants to try to take a property back that has 60% vacancy and operate that,” Lima One Capital head of CRE Cortney Newmans said. “We don’t want the keys back. So coming up with a business plan to help the borrower over the next 12 to 24 months is going to be key.”’

Banks are especially motivated to work with borrowers to prevent loans from falling into foreclosure since the banking industry overall has pulled back from inking new loans, particularly for real estate, Peachtree Group Senior Vice President Taylor Pike said at the event, held Sept. 28 at the Thompson Buckhead.

The inability to create new loans means banks are motivated to “keep kicking the can” with borrowers for longer periods of time, Pike said.

“What we’re seeing that’s different from probably 15 years ago is we’re seeing a record number of workouts,” said Tony Trahan, a director at tax and valuation consulting firm KE Andrews. “Banks are more willing to work with properties now.”

Still, panelists say they expect some borrowers to default. Those who borrowed in 2021 and 2022 using aggressive valuation projections and floating-rate debt are the most vulnerable in the “choppy times ahead,” and may be forced to accept foreclosure, Trahan said.

“There’s going to be distress. There’s going to be buying opportunities next year,” he said.

Fast-rising interest rates are a major culprit of that distress in multifamily. The Federal Reserve's campaign to combat inflation by increasing borrowing costs has iced activity in commercial real estate across the board and created a cascading effect on demand and property values.

During the past decade, investors used cheap money to make aggressive deals with higher leverage strategies, including the use of variable rates on loans, Cityview CEO Sean Burton and Associate Ryan Graf say in a June paper for Urban Land Institute.

Those days are gone. Trion Properties managing partner Max Sharkansky said his firm purchased a 200-unit apartment in Denver in the past year with a loan at a 5.1% interest rate.

“Earlier this week, we got the identical loan quoted and it’s 6.3%. So you can’t look at that and say that’s not going to affect the way you look at deal pricing,” Sharkansky said. “We’re a leveraged business, and it’s very much driven by rates. We’re seeing 120 basis points [of movement]. This is massive.”

Interest rates also are complicating developers’ efforts to start new apartment projects. Demand for housing is booming, with household growth projected to jump 11.8% in Georgia between 2020 and 2030 to 4.36 million total households in the state, according to Urban Institute.

But Mill Creek Residential Senior Managing Director Patrick Chesser said developers are increasingly struggling to make new housing projects work as every part of the process has become more expensive.

“You just had to change your thinking to get an achievable yield,” Chesser said. “Today, you’re going to have to price it right, you’re going to have to plan it right and [find] an accommodating land seller."