The outlines of apartment complex woes painted over the past year are now being clarified by the data.
The chart shows that the problem extends beyond high-value players who are squeezed by floating-rate loans.
Apartment transactions that were delinquent or in special administration and funded with commercial mortgage-backed securities rose 185% in late June compared to January, according to a report by CRED iQ.
“We've seen a surge in multifamily housing since the beginning of the year,” said report author Mike Haas.
The surge marked the largest increase in commercial real estate assets during the period.
The data shows that deterioration of multifamily loans is not only accelerating, it's also skyrocketing.
The loan products tracked by CRED iQ are not primarily debt taken out by borrowers looking to fix up and resell their homes, which has suffered the majority of defaults and foreclosure actions this period.
Sponsors including GVA, Tides Equities and Nithya Capital relied heavily on another type of securitized product called commercial mortgage-backed obligations, or CRE CLOs.
The debt has floating rates and is short-term, making it a go-to option for investors looking to make a quick exit early in the pandemic when interest rates were at their lowest. After rates spiked, these borrowers struggled or were unable to make their loan payments, especially businesses that hadn't yet finished renovations.
According to a previous CRED iQ report, 46% of all CRE CLO loans were in some sort of trouble as of the end of May, either on a watch list, in special servicing or in delinquency.
But CMBS is a different matter: The loan terms are long — typically five, seven or 10 years — and fixed interest rates, representing a problem that plagues speculative multifamily buyers that is now spreading to investors with long-term holding strategies.
The challenge here is refinancing.
Despite recent signs that slowing inflation may lead the Federal Reserve to cut interest rates in September, borrowers with current loan maturities are still being forced to find new sources of borrowing in a high-interest rate environment.
For some, that means bringing more capital to the table. For example, Blackstone earlier this year was looking to refinance $550 million of its $618 million CMBS Sunbelt multifamily loans. The deal would have included $83 million in new capital.
Borrowers less well capitalized than Blackstone may not have that capital on hand.
While the market has been hyping a possible rate cut, many economists believe the Fed's first cut will only lower interest rates by 25 basis points — not enough to ease the refinancing pain for borrowers with payments coming due this fall.
“Is there room to lower interest rates and make some of these loans a little more workable? Absolutely,” BGO chief economist Ryan Severino said on The Real Deal's “Deconstruct” podcast.
“But I'm not sure we'll see any significant rate cuts in the short term,” he said.
The impact looks far-reaching: 35% of all multifamily loans are due to mature in the next 18 months, according to CRED iQ, making them the largest share of CRE debt.
More than 7% of CMBS multifamily loans became non-performing last month as a result of these measures, compared with 8.6% of overall CMBS debt. The overall CRE non-performing loan rate hit a record high for the fourth consecutive month in June.
Considering only delinquencies and specially serviced loans, roughly 10% of all CRE CLOs are in non-performing status, with multifamily's non-performing loan rate standing at roughly 13%.
read more
'Multifamily is a target': Executives discuss challenges, opportunities at Milken Conference
Two more DFW foreclosures hit