The Path Forward: Multifamily Asset Success in a Challenging Market

By Lori Casey

Director, Credit Solutions

Over the past two years, the U.S. multifamily asset class has demonstrated remarkable resilience in the face of significant challenges. High interest rates, inflation and an influx of new supply have collectively squeezed operators’ margins and put pressure on underlying loan performance.

In July 2023, the Federal Reserve ended an aggressive 18-month interest rate hike spree, negatively affecting mortgage applications and asset values. This has limited finance liquidity for sponsors and widened the affordability gap for first-time buyers, forcing them to rent longer. Inflation has significantly increased multifamily operators’ costs, with insurance premiums up 120% since 2020 and property taxes up 40% since 2018. Rising minimum wages and higher capex budgets due to increased material costs have further eroded already thin margins.

According to Yardi Matrix, multifamily rents across the US are up 1.1% year-to-date expected to reach 1.7% by year end 2024, a significant decrease to the 24% increase in 2021 and 2022. The headwinds across the asset class related to rent growth and occupancy cease to exist. Pandemic-era construction delays have culminated in an all-time high delivery slate for the apartment sector in 2023 and 2024, with around 900,000 units representing a 5% growth in U.S. housing stock, according to Marcus & Millichap data. This includes 480,000 units expected in 2024, potentially increasing vacancies and slowing rental growth. According to Green Street Capital, multifamily asset values have dropped by 30% since March 2022, and CoStar rental data for 80 multifamily markets indicates that 23% of projected rent forecast numbers for 2024 are negative, underscoring the margin squeeze for operators.

Many operators are unable to refinance loans given higher interest rates and tighter underwriting standards. Loan modifications and extensions allow lenders to keep troubled loans off balance sheets and provide sponsors time to complete their business plans. But unlike the post-GFC era’s “extend and pretend” approach, in this cycle, lenders have adopted a more pragmatic “stop and shop” approach, where lenders proactively work with sponsors to cure potential defaults, or sell assets, before covenants are breached. This approach has resulted in a much lower default rate for multifamily assets compared to the GFC era. Per Mortgage Bankers Association, CMBS multifamily delinquency rates as of Q1 2024 are 4.35% versus 8.71% YE 2010 and Bank/Thrifts delinquency rates of Q1 2024 are 1.03% versus 4.21% YE 2010.

“Multifamily investors who purchased between summer 2021 and summer 2022, chose floating rate debt and are poor property managers are having some real challenges right now,” says Mike Kemether, Executive Vice Chair, Sunbelt Multifamily Advisory Group, at Cushman & Wakefield. “Operational excellence is crucial, as this is one of the few levers available where owners can at least improve their hands. Some have been effective at improving operations, while others continue to fall short.”

Proactive Measures and Collaborative Solutions

When it comes to lender-sponsor negotiations and implementing long-term solutions, it’s best to address issues before they escalate into distress. Lenders have had success with proactive strategies that include:

1. Expand Creditor Relationship: Through loan modifications or restructuring, providing additional time for sponsors to complete their business plans.
2. Forbearance Agreements: Allowing sponsors time to raise third-party capital, preventing defaults and extending loan terms.
3. Dual Track Sale Process: Enabling asset sales at prevailing values rather than under foreclosure pressure, curing looming defaults.

Lenders are more willing to recommit to long-term relationships with sponsors who maintain their assets, manage proactively, and are transparent about issues. This transparency motivates lenders to protect collateral value. Conversely, uncooperative, or passive operators may be replaced if necessary. It is important to enforce strict cash management practices, protect collateral income, and provide accurate cash flow insights. When necessary, lenders will foreclose on negligent borrowers and replace them with institutional quality sponsors capable of realizing operational efficiencies. These strategies have maintained resilient multifamily loan performance and historically low default rates.

“In managing multifamily properties, addressing problems promptly is crucial,” explains Avery Solomon, Executive Managing Director, Investor Services, Multifamily Asset Services, Americas at Cushman & Wakefield. “Quick resolution of delinquencies, rapid identification of outstanding payables, and timely rent collection are essential to reverse occupancy decline and recover value.”

Conclusion

The outlook for the U.S. multifamily sector over the next 12 months is precarious. The ongoing supply surge will enter the market as rents are forecast to soften across major markets. For many operators, the environment may continue to deteriorate before markets bottom and recover. With a proactive approach, and the right partner, there are creative capital solutions for the majority of the U.S. multifamily loan book, preventing potential stress from descending into distress. Transparency by sponsors is essential to establish lenders’ willingness to “stop and shop” – and give responsible owners the time to raise capital, or sell without a foreclosure, and achieve their business plans.

As Cushman & Wakefield’s Mike Kemether concludes: “With record multifamily deliveries in 2023 and 2024 and softening submarket occupancies, the silver lining is that the second half of 2025 and beyond will have minimal deliveries, setting the stage for very strong operational years on the horizon for markets with projected population and job growth.”

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Lori Casey, Director, Credit Solutions at Trimont, has over 25 years of commercial real estate finance experience, with a focus on multifamily. In this time, Ms. Casey has worked through multiple market cycles and held a variety of multifamily-focused roles, including acquisitions, financing, and portfolio management. Ms. Casey gained her experience working for a range of firms, from large financial institutions such as Credit Suisse and AIG, debt providers such as Arbor and RCG Longview, to operating her own multifamily investment firm.

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