Timing is everything in real estate. Many are learning the hard way that having to sell when the market is down puts investors’ equity in jeopardy.
I think we are still in the early innings of this decline. The average downturn in housing can last 33 to 70 months.
Higher interest rates are causing commercial multifamily transactions to plummet. CoStar reports that apartment building sales have dropped to their lowest levels since 2009.
This Time It’s Different
For the last year, I have watched and listened to countless real estate professionals on social media trying to almost will the market to new heights. This time it’s different!
I would argue it looks eerily similar based on the recent bank failures after the runup in interest rates. Look at the charts below:
Lending standards did tighten after the GFC, but market conditions seem fragile. The bank failures are causing a credit crunch which Fed Chair Jerome Powell said may help with inflation.
He also said that current conditions are likely to weigh on economic growth and hiring. The yield curve is at its deepest inversion since 1981.
The 2/10 year yield curve has inverted six to 24 months before each recession since 1955, according to a 2018 report by researchers at the San Francisco Fed.
Multifamily Real Estate
There are some deals still getting done today. Agency loans are still widely available in most markets, but sellers are still holding firm on prices. Cap rates have expanded 100 to 150 basis points, but most deals do not pencil at the higher interest rates.
I expect that deal volume likely will not pick up until sellers are forced to sell. The commercial real estate debt problem is going to worsen over the next year.
According to the Real Deal, $176 billion in multifamily debt is maturing in the next five years. Nearly half is set to mature in 2023 and 2024 alone.
During a credit crunch I think liquidity will become an issue. Lenders may not want to extend, and some may call loans due early like they did during the GFC.
So, what are the options for borrowers that have an upcoming maturity? I think they have a few options:
- Sell now if there is enough equity in the property at the current cap rate in case cap rates expand further.
- Capital Call and refinance into a 5-year agency loan to weather the storm.
- Look for a bridge-to-bridge financing solution if there is not enough equity in the deal.
Conclusion
It is time to take action if you have a maturity coming up in the next 6 to 12 months. If a recession takes hold, the numbers are not going to look better. We are already seeing some softening in rents. Increased taxes and insurance are also not helping the situation.
If you are interested in seeing what a bridge-to-bridge loan looks like, please reach out at jwilson@oldcapitallending.com.
