Refinancing a multifamily loan is getting harder for borrowers as higher interest rates collide with loans made at the peak of the low-rate era.

The yield on 10-year Treasury bonds, a key benchmark for commercial real estate borrowing costs, broke 5% this week for the first sustained period since 2007. The Federal Reserve also raised its benchmark rate Wednesday for the first time since 2023, adding further pressure to borrowing costs.

That is creating a problem for borrowers who took out low-interest loans to acquire multifamily properties between 2020 and 2022 and now face much higher costs to refinance that debt.

Inland Mortgage Capital President Art Rendak, who heads up the company’s bridge lending program, said he has received many requests from prospective borrowers for refinancing deals. But when he asks those borrowers to put in additional equity, many blanch.

While IMC is still looking for refinancing deals, acquisition loans are “the only deals the company is winning on,” Rendak said. Acquisition loans often come with fresh capital and a proven sponsor, while refinancing deals typically involve borrowers whose business plans haven’t worked after an extended period.

“It's hard for all lenders like me to go to committee and say, ‘Hey, it's the guy who can't pay his debt service’ or ‘he's at a 0.9 [debt service coverage ratio], and he's coming to us and he wants to refinance with us because his last guy's kicking him out,’” Rendak said.

“That story just doesn't play that well with an investment committee,” he added. “It's like, why is this guy in trouble? What did he do? What's he going to do differently?”

Of the $5T of outstanding commercial mortgages held by lenders and investors, 17%, or $875B, are scheduled to mature this year, according to the Mortgage Bankers Association. That includes 13% of mortgages backed by multifamily properties.

IMC lends floating-rate bridge loans nationwide valued between $5M and $20M, with terms of up to three years. It lends across property types, but multifamily lending makes up 43% of IMC’s portfolio, largely on Class-B and C deals.

Since IMC's inception in 2003, it has originated more than $1B in nonrecourse first-mortgage bridge notes.

The need for new debt is increasingly apparent in parts of the country where multifamily vacancy has risen and rent growth hasn’t matched some sponsors’ expectations, particularly in the Sun Belt. As of the second quarter, multifamily vacancy in San Antonio was 15.7%, compared with 12.7% in Austin and 11.6% in Phoenix, according to Cushman & Wakefield.

The only refinancing deal IMC has done since the pandemic was a hotel-to-multifamily conversion in Madison this June, which Rendak said was a special circumstance involving strong market fundamentals and a borrower willing to put in equity.

Rendak said lenders are hesitant to foreclose on many of the acquisitions made between 2020 and 2022, particularly in the Southeast, that are in “deep trouble,” even if those properties stand little chance of getting paid off soon. Lenders continue to wait for rates to fall or cap rates to compress, but Rendak said the elevated-rate environment is likely to stick around for a while, making it increasingly difficult to keep kicking the can down the road.

Capital needs to be put in these projects, they need to be rehabbed, and there needs to be a basis that makes sense for lenders to fund them, Rendak said.

“The banks could reset these bases, stop treating the borrowers with kid gloves, or do short sales or discounted payoffs,” he said. “We could put these assets into a better place than they are today, and certainly people like me would consider financing them if the debt wasn't so high.”

Multifamily assets have long been a desirable product type for lenders, who aren’t accustomed to taking losses on the product because of the historical belief that a new investor will eventually come along and pay at least the amount of the outstanding debt, Rendak said.

The good news is that there’s a lot of capital chasing multifamily, Rendak said. But debt funds and banks aren’t going to refinance deals at high debt yields without fresh capital. Something will eventually have to give, he said.

“It's just going to take the existing lenders to go, ‘Hey, we'll give you a 15% discount. Go find a new home for it,’” Rendak said.