Distressed Loans Double in Multifamily, Creating Opportunities for Investors

When it comes to stock market investing, one piece of advice you’ll often hear is not to try to time the market. For commercial real estate (CRE) investing, however, some buying opportunities are better than others. Real estate markets move through somewhat predictable cycles. Buying at the right time can have a sizable impact on the long-term profitability of a CRE investment. With this in mind, investors should inform their decision-making—especially as it relates to their entry and exit strategies—as much as possible with an understanding of the current phase of the cycle.

Today, changes in interest rates have been the dominant force behind a recent spike in multifamily distressed debt. The table below shows the amount of distressed loans within the multifamily sector—defined as any loan 30 days late, past maturity, or specially serviced—doubling in April of 2024. That rate climbed to a record high of 11% in August¹.

Why the distress?

The interest rate tightening cycle that began in 2022 drove mortgage costs higher for multifamily property owners. As interest rates climbed, the lending costs borne by multifamily owners often exceeded the income generated by their rents. For those needing to refinance, options were limited to loans at levels significantly higher than those they started with². Developers who took on floating rate loans prior to the start of the tightening cycle have been especially impacted³.

Distressed loans, not distressed assets.

Investors who buy into multifamily properties at the deep discounts we are seeing today stand to potentially benefit as prices recover in future months. We’ve seen opportunities like this before. During the global financial crisis of 2007-08, the subprime mortgage crisis caused a collapse in home prices as the housing bubble burst. The result was a spike in distressed loans and an unprecedented opportunity to buy quality assets at deep discounts.

Case in point, as the market was turning, Forum secured land for its first multifamily development in 2008, building the firm’s foundation as a multifamily developer. By accurately assessing the market cycle, Forum was able to secure land at an ideal time and capitalize on the recovery in real estate prices that followed. While today’s environment differs from the conditions that led to the global financial crisis, similar market dynamics are creating what we view as timely and compelling investment opportunities.

The risk is higher when buying distressed assets.

Navigating the waters of today’s multifamily distressed debt opportunities requires knowledge, insight and experience that spans market cycles. The key is to have the experience and expertise to identify high quality assets with strong growth potential from a growing pool of distressed properties. As with all cyclical opportunities, the window to participate dissipates as the market normalizes. For example, if the Fed continues to reduce interest rates, property owners focus again on growth, potentially creating a different kind of opportunity.

• Find out more about how multifamily investing can play a part in your clients’ income and diversification strategies, here.
• Learn about the qualities that distinguish multifamily from other CRE sectors, here.
• Talk to us to find out more about today’s cyclical opportunities in multifamily.

¹ Source: The Real Deal – Real Estate News; “Multifamily CMBS Distress Nearly Triples in 6 Months” , July 12, 2024.
²Source: Multi-Housing News; “More Distress Looms in Multifamily Finance: Here’s Why“, January 31, 2024.
³ Source: CRED iQ. 2024; “Overall Distress Rate Reaches a Sixth Straight Record High, Led by a 260 Basis Point Surge by Multifamily“, September 5, 2024.