It was only six months ago that 29th Street Capital poached Jeff Day from Newmark, where he rose to become head of multifamily capital markets, citing his skills in distressed loans and collateralized loan obligations as the main reason he was hired away.
That's not surprising given the challenges facing the Chicago-based multifamily investment firm, whose strategy of buying vintage, fix-it-up properties across the country has faced the hurdle of rising interest rates. Indeed, Day was hired as 29th Street's chief investment officer in January, but the firm's website now lists him as CEO.
The loan servicing company has paused or delayed renovations on some of its properties in recent months, according to a report on the loan servicing company compiled by credit rating firm Morningstar Credit. The company owns apartments in 23 markets, with its portfolio typically containing more than 100 units that were originally built 20 to 40 years ago, but also has some relatively new properties. The pause on projects means the company is slowing down the execution of its business plan to buy properties, upgrade and improve them, and then raise rents.
The work stoppage appears to come at the same time the company is facing headwinds on at least $258 million in floating-rate debt. Rising debt-service costs and interest rates as the Federal Reserve continues to fight inflation have led lenders to view nine of its properties as risky.
Loan servicing companies including Newmark and Berkadia are working on managing the debt 29th Street owes on the nine properties on behalf of lenders including Lady Capital and Bridge Investment Group Inc. All nine complexes appear to have been hit hard by rising borrowing costs on adjustable-rate loans taken out between 2020 and 2022, according to loan data from ratings firm Morningstar Credit.
Morningstar Credit recently reported that 29th Street is injecting cash to cover debt shortfalls on a string of properties from the West Coast to the Deep South, including:
Lincoln Medical Center Apartments, $18.3 million, 224 units, Houston Waterside at Riverpark Place, $18.6 million, 107 units, Louisville, Kentucky 79 Metcalf Apartments, $33.5 million, 280 units, Overland Park, Kansas Spalding Bridge, $29.7 million, 192 units, Atlanta The Highbank, $37.6 million, 284 units, Houston Southglenn Place, $18.6 million, 107 units, Centennial, Colorado Avana Sterling Ridge, $37.2 million, 254 units, The Woodlands, Texas The Lake House at Martin's Landing, $47 million, 300 units, Roswell, Georgia The Davenport Apartment Homes, $17.8 million, 126 unitsUnit, Sacramento, California
The loan servicing companies involved in the 29th Street transaction either declined to comment or did not respond to requests for comment.
Rob Bollhoffer, managing partner at 29th Street for the past decade, said in December that the firm had handled “most” of the interest rate caps, a financial mechanism that passes on the burden of rising interest rates on adjustable-rate loans to borrowers.
“It's just slow here,” Bollhoffer said at the time. He denied allegations that more than $200 million in adjustable-rate loans on apartment complexes owned by 29th Street were placed on watch lists by lenders last year and were coming due for repayment.
“We have extended all of our loans that were approaching maturity,” 29th Street founder Stan Belaznick said in a Dec. 27 email.
Still, 29th Street is one of several multifamily operators that have drawn concerns from lenders since raising money from investors and buying properties with adjustable-rate debt after the COVID-19 pandemic roiled the economy.
The company and its executives did not respond to subsequent requests for comment as additional lending data detailed further deterioration in the properties' revenue streams.
29th Street Capital was founded in 2009 by Belaznik, who made his first real estate investment at an auction on the steps of a San Francisco courthouse: a home on the street that bears the company's name.
According to its website, the company had purchased 10,000 apartments by 2018, and doubled that number to 20,000 two years later. As of earlier this year, its portfolio consisted of more than 15,000 units, according to a company press release. Last year, the company purchased 18 properties with more than 5,000 units, the press release noted.
According to the loan data, landlords did not expect interest rates to rise as sharply as they did when they were borrowing funds for the deals. All of the properties have debt service ratios (DSCRs) well below the breakeven point of 1.0, which typically means the borrowers will have to pump additional cash into the deal to repay the debt. Lenders typically put loans in these situations on a watch list, where they will be subject to special monitoring until the borrowers can improve the performance of the properties.
At 79 Metcalf 29th Street, a property in Kansas, the DSCR fell to 0.26 in 2023. The loan matures in May, and lender is evaluating a possible maturity extension, according to loan data.
“The property is [the] At the end [a] “Extensive renovations are underway and occupancy rates are steadily increasing as units begin to occupy,” loan-servicing firm Berkadia said in a report last month. An affiliate of 29th Street, which secured financing against the property, expects its cash flows to increase starting in the first quarter of this year, but it's unclear whether the property's performance has improved.
The 29th Street loan tracked by The Real Deal is just a small part of the company's vast multifamily portfolio. Most of the other properties are tied up in debt that isn't securitized or rated by Morningstar, meaning there's less public information about their performance. Data on debt monitored by the rating agencies comes from reports on collateralized loan obligations (CLOs) — loans against multiple commercial properties bundled together and then sold off by the original lenders in installments — and commercial mortgage-backed collateralized loans owned by Freddie Mac.
But the high-profile deal on 29th Street shows the brutal impact rising rates can have on borrowers with floating-rate debt.
Debt service costs for a lake house in Martin's Landing north of Atlanta are now more than triple what dealmakers assumed when the loan was created, driving the property's interest-cap escrow — money set aside in case a borrower needs to buy new equipment to cushion the impact of rising interest rates — up from just $990 a month at the start of the deal to more than $200,000 a month, according to loan servicer comments.
It's not yet clear what the landlord's plans are to address the concerns raised by the lenders, and it's unclear whether the 29th Street property will be able to meet capital requirements that lenders may impose to extend maturity dates, some of which are set for later this year and a few that don't expire until 2030.
At least one lender is starting to make moves on the 29th Street deal.
In February, the manager of a CLO structured by an affiliate of Bridge removed a $35 million loan for a 192-unit apartment complex at 131-171 South Burlington Avenue in Los Angeles from its 29th Street loan, which had been plagued by defaults since 2022, according to lending data.The move allows the lender to replace troubled loans in the pool with performing loans, protecting other investors in the CLO from losses from defaults while allowing the original lender to keep the bad loans on its own books.
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Variable rates reduce Chicago-area multifamily loans by $240 million