At Issue DC - Financing Troubles Spread to Multifamily Sector
The story of distress in the office sector has been well covered in recent months. The proliferation of remote and hybrid work has largely emptied downtowns, heavily reduced foot traffic to local businesses that once catered to downtown employees, and resulted in employers looking to downsize their office space or move to newer, amenity-rich office buildings. This shifting demand could result in a 35 percent decline in office values by the end of 2025 (Bisnow)
The result has been owners of older office spaces seeing reduced revenue and facing the daunting task of refinancing in an inflationary environment amidst rising borrowing costs. Meanwhile, lenders and investors have responded to this rapid change by deploying capital elsewhere (Bisnow).
Yet this dynamic is not exclusive to office buildings. Multifamily is experiencing similar financing troubles, with a massive amount of hard-to-refinance debt coming due in October and November of this year alone (Bisnow). Owners will likely need to contribute a significant amount of equity (cash) upon refinancing, in the range of an additional 15-50 percent of the original cash amount used to purchase the property, depending on net operating income growth.
Typically, owners are cashing out at refinancing, using new realized value to pay investors and cover significant capital improvement and maintenance activities. Moreover, borrowing costs for wall street financing, known as commercial mortgage-backed securities (CMBS) loans, has hit 7 percent, doubling a pandemic low of 3.5 percent (Bisnow). CMBS loans, although not as common a lending source as banks or insurance companies, are usually the cheapest source of financing available to commercial property owners.
These financing troubles, coupled with competition for a now capped number of Low-Income Housing Tax Credits and rising construction and insurance costs, are having tangible effects on affordable housing preservation (DCist) and new construction alike (Globe St.).
Given the turbulent and difficult market conditions, policymakers should be cautious of implementing significant industry-related policy changes that could plunge numerous multifamily properties into deeper financial distress.
- Multifamily Debt Originations Drop Dramatically and the GSEs Aren't Filling in the Gap
- Refinancing Could Be Disaster for Many Loans, Not Just Office
- CRE Lending Index Drops 33%
- Wall Of Multifamily Maturities Dead Ahead: $4B In October Alone
- Insurance Costs Jump 26% For U.S. Multifamily Properties
- Borrowing Costs For CMBS Loans Jump To 7%, Doubling Pandemic Lows
- HUD Sees ‘Massive Drop’ In Multifamily Deal Volume, Slowing Housing Production
- Office Values Unlikely to Recover Before 2040