Real Estate Crash / Multifamily
The multifamily hangover nobody puts on the front page
Apartment buildings bought with floating-rate debt and a rent growth assumption are the quietest large problem in commercial property.
Offices get the coverage because the vacancy is visible. The larger volume of stressed commercial lending sits in apartments, bought at low capitalisation rates with short-dated floating-rate debt on the assumption that rents would keep rising fast enough to grow into the price.
How the trade was structured
A syndicator raises equity from individual investors, buys a building with bridge debt, and buys an interest rate cap because the lender requires one. The plan is to renovate units, raise rents, then refinance into long-term fixed debt at a higher valuation. Every step of that plan depends on two variables: rent growth and the rate at refinancing.
When rates rose, the cost of replacing an expiring rate cap rose with them, often to a multiple of the original cost. Meanwhile new supply delivered into the strongest markets, flattening rents in exactly the places the underwriting assumed the most growth.
The building is fine. The occupancy is fine. The capital structure is the problem, and no amount of good property management fixes a capital structure.
Where the losses land
Not with banks first. Much of this debt sits in securitised commercial mortgage vehicles and with debt funds, which means the losses are distributed across investors who bought a yield product and did not think of themselves as property investors. The equity, raised from individuals a hundred thousand dollars at a time, is usually gone before any of this is visible in a headline.
Why it stays quiet
Apartments do not empty out. Occupancy stays high while the ownership fails, because the tenant demand is real. The failure is financial and it resolves through recapitalisation, handover to the lender, or a sale at a price the original equity does not survive. None of that produces a photograph.
What to watch
- Delinquency and special servicing rates in floating-rate multifamily securitisations.
- Rate cap replacement costs and the maturity calendar of bridge loans.
- New supply deliveries versus absorption in the metros that attracted the most capital.
- Capital calls at syndicators, which are the first sign that the equity has been exhausted.