Posts

A $1 Trillion-Plus Wall Of Multifamily Debt Will Mature By 2027

tsunami_canstockphoto15837319 800x315

Although loans backing office properties are the most scrutinized these days, a wall of debt is also maturing within the multifamily sector in the coming years.

And while multifamily continues to be seen as one of the safer asset classes, already, there’ve been recent examples of loan defaults on multifamily portfolios, including four properties in Houston totaling 3,200 units that went to foreclosure last month.

Aaron Jodka, director of national capital-markets research at Colliers International Group Inc., said the multifamily market right now is an interesting test case — while rents aren’t growing as fast as they were 18 months ago, many markets continue to see positive growth and occupancy remains strong.

Looking strictly at the apartment market, nationally, net absorption was 19,243 in the first quarter of 2023, and occupancy stood at 94.7% in March, a drop from the peak of 97.6% in February 2022 but about the same as the average observed in the decade before the pandemic, according to RealPage Inc. Same-store effective asking rents for new apartment leases increased 0.3% in Q1.

But buyers and sellers continue to be at a stalemate, including within multifamily, a darling of the real estate investment world in recent years, Jodka said.

From the early 2000s through the global financial crisis and shortly thereafter, multifamily drove about 24% of all investment sales activity, according to Colliers. Between 2012 and 2020, that sector received about 33% of activity.

By 2020 to 2022, multifamily represented 43% of all investment.

“We’re increasingly seeing larger and larger investment flows, which means we have more and more maturities coming, as you’ve had additional volume,” Jodka said.

In particular, borrowers that recently financed multifamily deals with short-term floating-rate debt without anticipating the significant run-up in interest rates are facing higher loan payments now and could run into issues at refinancing, he added.

And a significant amount of loan maturities within multifamily are coming due soon. The Mortgage Bankers Association estimates, overall, there’s $2.6 trillion of loan maturities through 2027, with multifamily making up 38%.

Those who track the commercial real estate market say, like any property type, multifamily is likely to see a greater amount of distress in the coming months and years, but financing challenges are likely to be more episodic than widespread. Capital sources, both on the debt and equity side, are also likelier to provide capital to multifamily more broadly than other asset classes, and there continues to be a tremendous amount of uninvested capital sitting on the sidelines, Jodka said.

 

Source:  SFBJ

/by

Commercial Real Estate’s Troubles Offer Opportunities For Investors

white opportunity sign on the shiny remarkable red wall_canstockphoto3532891 800x315

It’s no secret that the commercial real estate industry is struggling.

The Federal Reserve has hiked interest rates to their highest levels since 2007. The collapse of First Republic Bank last week represented the second-largest commercial bank failure in American history.

But, through all the tumult, there may be opportunities for investors looking to take advantage of the distress, panelists said at Commercial Observer’s State of Commercial Real Estate forum, hosted in partnership with L&L Holding Company.

JPMorgan Chase’s decision to buy First Republic, at the behest of federal regulators, certainly weighed on the minds of the public and private sector experts gathered at 222 Broadwaythe morning of May 2. But not so for Andrew Farkas, CEO of Island Capital Group.

“Now that you’re all distressed investors, this is good,” Farkas said during a fireside chat. “Don’t be afraid of defaulting loans. Don’t be afraid of down markets.”

While “a recession is never really good for anything,” Farkas said that tough markets like today’s are when “fortunes are made,” because investors can buy on the cheap. A slowdown in the debt markets also could encourage sellers to provide financing for acquisitions themselves, he added.

Still, the turbulence in the banking sector is another concern in a long list of problems facing New York City’s office market. A “wave of defaults” looms for office property debt, Richard Barkham, CBRE’s global chief economist, said in the opening panel, titled “2023 Economic Outlook: Analyzing Key Stats & Data.”

Office property values have dropped roughly 30 percent since the pre-pandemic peak of the market, and those buildings are unlikely to recover all of their value in the next five years, Barkham added.

But not every office building is in trouble. High-end, trophy properties are still seeing strong attendance, Jamil Lacourt, director of construction at L&L Holding, said in the “Office 2023: Where Occupier Innovations & Workplace Demand Meet” panel. Buildings that offer tenants data on their carbon footprint are more attractive to firms that are required to track their sustainability commitments, said Linda Foggie, CitiGroup’s global head of real estate operations.

Landlords can also use data to measure how tenants use amenities and what types of benefits keep renters coming back to their buildings, said Chase Garbarino, founder of workplace experience software company HqO. Panelists were joined by Colliers’ Michael Cohen and the Rockefeller Group’s Bill Edwards.

“The market environment today is creating a really good opportunity for the larger commercial real estate market to be more data-driven,” Garbarino said. “Commercial real estate does a better job than any industry in assessing the financial viability of their customers. And they probably have the least understanding of how people use their product.”

Buildings that can’t survive as offices could be converted into housing, if the property is the right size, zoned properly and empty of tenants, said Michael Pestronk, co-founder of real estate development firm Post Brothers.

“You need a lot of stars to be aligned in order to convert an office building,” said Shimon Shkury, president and founder of Ariel Property Advisors, in the “Investment Sales, Conversions & The Rise of the Rental Market” panel. “The city and state, if possible, have to think about subsidies and help people that want to come here and convert office buildings.”

Gov. Kathy Hochul proposed a tax incentive to turn office space into housing in her initial budget in February, though most of the governor’s housing agenda was cut during budget negotiations. But Melissa Román Burch, CEO of the New York City Economic Development Corporation, said legislation to support conversions could be passed before the legislative session ends in June.

Not all commercial real estate properties need a complete redesign. Multifamily properties remain a strong asset class as rising rents outpace the impact of higher interest rates on owners’ bottom lines. (Farkas said he was “all-in” on single-family rentals. “Single-family home rental has been unbelievable,” Farkas said. “And 10 years ago, I told everybody they were going to lose their ask. Wrong!”)

Life sciences space and data centers are also still in demand, particularly thanks to the exponential growth in the amount of data collected by companies that utilize artificial intelligence technology, Rob Harper, head of real estate asset management in the Americas at Blackstone (BX), said in the panel “A Deep Dive Into the State of CRE Market: Paving the Road to Stabilization.”

Last, it was on to retail.

Retail leasing activity has started to trend up slightly, said Fred Posniak, senior vice president of leasing at Empire State Realty Trust. That could be because the retailers that survived the pandemic represent a stronger crop of businesses, Andrew Mandell, vice chairman at Ripco Real Estate, said in the “What’s Next for Retail: The Innovative Strategies Driving the Retail Revival” panel.

Still, retail is far from immune to inflation and the higher cost of debt, which can make it more difficult for retailers to raise funds to expand to new locations, Posniak said.

 

Source:  Commercial Observer

 

/by