A research brief from Gray Capital looks at the impact of the emerging “higher for longer” interest rate environment on multifamily property. It finds that near-term distress may arise as borrowers seek to replace the high volume of loans that will be maturing over the next year.
A shifting lending environment
In addition to the current higher interest rate environment, other aspects of the lending environment are acting to put pressure on borrowers. The origination debt service coverage ratios (DSCR) for multifamily loans, which had been averaging around 65 percent before the pandemic, are now about 10 percentage points lower. In addition, the origination loan to value (LTV) ratios on multifamily loans have fallen significantly.
Other trends also work against multifamily property owners. These include rising operating expenses and slower revenue growth.
Together these trends mean that borrowers who need to refinance their loans will face more demanding terms than those on their existing loans, possibly leading to distress.
The coming wave
Compounding the effect of the shift in the lending environment is the high volume of loans that are expected to mature by the end of 2024, which will have to be refinanced. This volume is partly attributed to maturing bridge loans taken out during Q4 2021 when apartment sales soared.
Gray Capital suggests that the pressure on owners will cause them to adjust their property pricing expectation to be more in line with those of potential buyers. Converging pricing expectations should cause sales transaction volumes to rebound from their currently suppressed levels.
Ending on a high note
While the high post-pandemic rate of rent growth has been well documented, the brief notes that single-family home prices have risen even faster. Single-family home prices are up 44 percent since Q1 2020 while apartment rents are up only 24 percent. The high demand for housing reflected in these price increases should keep the apartment market strong despite the high levels of deliveries expected over the next 18 months.
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