Large apartment complexes remain at risk of catastrophic losses

Food, housing and health care have traditionally been some of the world’s most stable sources of employment and investment. While office space is selling off for remote work, owners of larger homes Multifamily Buildings are mostly immune to the same fluctuations. After all, rents have increased more than they have for decades.

Many single-family homes are now out of reach due to rising home prices and high interest ratesmultifamily appears to be a safe bet. But that could all soon change, according to new data.

Rising interest rates and weakening demand

Can there be too much of a good thing? Apparently, yes. Developers and lenders are so bullish on multifamily housing that they’ve unleashed an unprecedented building boom, fueled by migration from the Northeast and California to the Sun Belt and the Midwest.

500,000 new apartments The United States will increase the number of new additions in 2023, the most in 40 years, and is expected to complete a similar number in 2024. New York Times, Analysts worry that up to 20% of apartment loans could be at risk of default. High interest rates and oversupply drive rising rents Interest rates fall in a former Sun Belt hotspot.

Lenders worry about default

Lenders have seen the storm clouds brewing and are wary of funding projects – even if developers have purchased the land – for fear the land will not be leased. Those who have taken out loans are worried about what will happen in the future.

this end The result is that the time increases That The time it takes for developers to buy, obtain permit approval and start construction has shortened to about 500 days, a 45% increase from 2019, according to real estate data companies Yadi Matrix.

U.S. Census Bureau data showed multifamily housing starts fell to an annual rate of 322,000 units in April, the lowest level on record April interest rate Since 2020. boughtdevelopers can only take responsibility, consuming holding costs and investors’ patience, as has happened recently Unit 104 Development In Boise, Idaho.

Delinquent multifamily loans have been increasing. According to data, loans that are at least 30 days overdue or in non-accrual status have increased to US$3.46 billion in the fourth quarter (2023), a quarterly increase of 43.1% and an annual increase of 81.2%. S&P Global Market Intelligence.

Still, multifamily lending is far from a full-blown crisis. According to the Commercial Real Estate Finance Council, a trade association whose members include lenders and investors, 1.7% of multifamily loans are at least 30 days delinquentwhile office loans are about 7% and hotel and retail loans are about 6%.

The perfect storm of rising costs

It’s easy to blame high interest rates for the problems multifamily housing is facing, but that’s not entirely accurate. although some loans have breach of contract When interest rates reset and some Syndicated deals to buy through variable rate mortgages have collapsedOverlay problem tend to A combination of factors. These include low occupancy rates, falling rents and high costs, including insurance costs, surge and extreme weather.

this The foregoing new york times The article mentioned defaulted loans at Reserve, a 982-unit complex near Tampa in Brandon, Fla., and Oaks of Westchase, a 182-unit garden-style apartment building in Houston, according to principal Mike Mike Haas, an executive at data provider CRED iQ, said “surging interest rates are causing the debt service costs of these properties to skyrocket.”

However, lack of demand is also a factor. In 2019, 120,000 new apartment units were built in 19 major Sunbelt cities, attracting 110,000 tenants. Last year, there were only 95,000 tenants in 216,000 new apartments.

“Developers are out of control,” said Jay Lybik, national director of multifamily analysis for CoStar Group. New York Times article. “Everyone thinks demand in 2021 will be the way It’s moving forward.

Smaller banks face greater risks

The difference between residential properties and other types of commercial buildings is that Financing available for multi-family units Loans through government-backed mortgage giants Fannie Mae and Freddie Mac were created by Congress to make homes more affordable. At the end of 2023, 49 banks had at least 5% of their multifamily loans delinquent, Reuters reports. Most of these are made up of regional and community banks.

“Multifamily loans under stress include those that are rent stable, rely on overly optimistic rental income growth forecasts, or are located in submarkets with high rental vacancy rates. and / or There is an oversupply, many of which are located in Sunbelt states, particularly Texas, Florida, Tennessee and the Carolinas,” Fitch Ratings Reuters reported earlier this year that is based on.

So far, small community banks, with average assets of $1.3 billion, face the greatest Exposed. Nearly 40% of total multifamily lending in the U.S. banking system, according to Fitch hold go through 10 A bank that owns many other assets. By comparison, bankrupt Silicon Valley Bank had $209 billion in assets, while JPMorgan Chase, the largest U.S. bank, had $3.3 trillion. In terms of assets.

Fitch said: “We expect any deterioration in the banking sector to occur over a longer period. During the global financial crisis, losses did not peak until nearly two years after the peak of delinquencies, and the sector’s problem loans had not yet peaked.

Multifamily also has another built-in defensive shield: “If regional banks and large investment banks decide not to make multifamily loans anymore, Fannie Mae and Freddie Mac will get more business,” says Multifamily Chief said Lonnie Hendry, Product Officer. New York Times. “It’s an automatic failsafe that other asset classes simply don’t have.”

final thoughts

Excess supply always leads to lower demand and lower prices. However, when rising costs and high interest rates have a compounding effect, the results can be catastrophic Added.

This doesn’t mean that all rental housing is a bad investment, because as the evidence shows, rental real estate is one of the worst investments. Proven form of wealth accumulation. However, the headwinds facing large-scale multifamily mean you should perhaps Think twice before investing REIT or syndicated organizations, unless they have bought Low prices at deep discounts.

Depending on where you are in your investing journey, a safer investment might be a smaller multifamily property—at the right price or an all-cash deal that you can refinance later—which means less financial risk.

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Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.