Multifamily Sector Faces $8B Maturity Wall in Fall

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Good morning. A large amount of debt in the multifamily sector is coming due in October and November, causing uncertainty and potential distress for lenders and borrowers. Billionaire David Rubenstein sees an opportunity in the distressed office market. Meanwhile, Tides Equities is experiencing the impact of rising rates, informing investors to anticipate capital calls in the near future.

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Multifamily Faces $8B Challenge as CMBS Loans Mature this Fall

According to a recent report by Gray Capital, the formerly booming yet still popular multifamily sector is facing a looming wall of debt that will be difficult to refinance, anticipated to hit in October and November.

Dirty debt details: According to a report by Gray Capital, over $4B in commercial mortgage-backed securities (CMBS) loans associated with multifamily properties will mature in October, followed by nearly $4B in November. These figures don’t even account for non-CMBS loans, which means the actual total could be even higher. How CRE lenders will handle this upcoming debt wall remains uncertain.

The immediate impact: The peak of debt maturities in October and November raises concerns about the possibility of distress surpassing the point where lenders can choose to extend loans or resort to foreclosure. Gray Capital CEO Spencer Gray isn’t sure whether lender balance sheets will be negatively affected to the extent that they might be forced to make tough (impulsive) decisions. Multifamily owners in good standing and excellent locations may have a higher chance of finding solutions, while those with less to work with will have no choice but to face the music.

Really bad, then not as bad: After the peak in 4Q23, there is a temporary lull in maturities expected in early 2024, with monthly totals of less than $1B. However, another wave of debt is looming later next year. These successive waves of debt maturities stem from the peak in multifamily investment sales that occurred two years earlier when interest rates were low and demand for apartments was high. Now, with higher rates, borrowers are faced with the choice of selling or refinancing with additional capital.

Not meeting in the middle: Refinancing may not be feasible for lower-quality assets or properties that are strong but not perfect. Even for those who can afford to refinance, additional equity contributions of 15–50% of the original amount are expected. Stagnant investment sales also poses its own challenges, as price discovery remains uncertain. The gap between buyers and sellers is estimated to be between 10–20% right now, further impacting the refi landscape.

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Financial quagmire: The multifamily sector faces a complex financial situation as it navigates the upcoming debt walls. Despite the strong demand for housing and historically high rents, the timing of this debt crisis couldn't be worse. Multifamily owners must grapple with the consequences of financing assets ahead of a sudden rise in interest rates. Uncertain market conditions pose challenges for refinancing, forcing owners to either sell their properties or bring additional capital to the table to avoid default or foreclosure.

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Carlyle Group Sees CRE Debt in Downtown Offices as Prime Investment

While many investors are shying away from the office sector, David Rubenstein, co-chair of Carlyle Group, views the distressed sector as a prime investment opportunity. He advocates for buying downtown office building debt from banks, a view he expressed at Bisnow's D.C. market event.

Turning liabilities into assets: David Rubenstein acknowledges the devaluation of office buildings due to tenant exodus and decreasing footprints. Despite this, he perceives potential in purchasing commercial real estate debt from banks eager to discard it. With tenants migrating to modern properties, reducing space requirements, and bargaining for lower rents, all amplified by high interest rates, Rubenstein foresees a continued decline in downtown office values.

Diamond hands: Rubenstein, a billionaire investor who once served in President Jimmy Carter's administration before co-founding Carlyle Group in 1987, manages assets worth $370B, with $72B in available capital. In light of a study predicting a 43.9% drop in the average value of New York City office buildings by 2029, and a report projecting a 35% decline in nationwide office values by 2025, Rubenstein still maintains a positive outlook.

Market standoff: Amidst these market challenges, many property owners are reluctant to invest more into struggling properties, and banks, too, are hesitant to repossess these properties. Rubenstein suggests that this stand-off situation might eventually lead to banks acquiring these devalued properties at a significantly discounted rate.

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Once-in-a-decade opportunity: According to Rubenstein, the eventuality of banks reclaiming these devalued properties will present an unprecedented investment opportunity akin to the situation after the Great Recession. He anticipates that this could shape up to be an exceptionally lucrative business venture. Despite the market's current woes, Rubenstein's outlook underlines the potential to transform the crisis into a compelling investment opportunity.

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Feeling The Heat, Tides Equities Considers Capital Calls Amid Cash Crunch

In a letter obtained by The Real Deal, Tides Equities co-founders Sean Kia and Ryan Andrade have informed investors to expect capital calls to address cash liquidity issues caused by rising interest rates.

Too much of a good thing: Tides Equities, based in Los Angeles, emerged as a dominant multifamily buyer in 2021 and 2022, acquiring over $6.5B worth of apartments across Sun Belt markets, many of which experienced double-digit rent growth. However, these purchases were primarily made through floating-rate loans during a time of low interest rates. As rates have surged, debt payments have risen, pushing some properties into negative cash flow territory.

Growing debt burden: According to a TRD data analysis from DBRS Morningstar, Tides Equities has around $1.5B across 47 loans due by 2025. With an average interest rate of 3.91% on its loans as of June and a median loan size of $29.1 million, the firm is struggling to yield enough income to cover debt payments at several properties. The issue is exacerbated at nine locations where the reported debt service coverage ratio is less than 1. Yikes…

Higher than expected: The issue of rising interest rates isn't unique to Tides Equities; it's causing a significant impact on multifamily property owners industry-wide. For instance, delinquencies on CMBS loans tied to multifamily properties have risen sharply. As per data from Trepp, it jumped to 3.04% in March, compared to 1.66% in March 2023.

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Navigating through the crisis: In dealing with the challenges, Tides Equities is resorting to capital calls. Up to 20% of Tides’ portfolio, spanning approximately 32,000 units, may require capital calls. Although Tides has attempted multiple strategies to raise cash, they're now temporarily utilizing their funds to make mortgage payments. However, the co-founders have acknowledged in their letter that they may not maintain their record of timely mortgage payments due to these circumstances, indicating a possibility of returning keys to the lenders.

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• Private powder keg: Alternative asset management firms such as Apollo, KKR, and Blackstone are bridging the lending shortfall, showcasing the growing power of private credit, which now controls $1.4T in assets.

• Resilient housing market: Despite interest rates reaching a 15-year peak, home construction in May experienced a significant increase and prices have risen. This robust performance has astounded several economists.

• Debt time bomb: The rise in interest rates and declining property values are pushing the commercial real estate market towards a dangerous edge, from San Francisco to Hong Kong.

• On a REIT roll: A year after introducing its initial real estate investment trust (REIT) exchange-traded fund, Armada ETF Advisors has created a new investment instrument to capitalize on the top-performing private REITs in public markets.

• Building Bridges: Bridge Investment Group and The Townsend Group are partnering to invest $147M in logistics assets, with a potential to raise it to $200M.

• Transparency triumphs: The NY legislature passed a bill requiring new LLCs to disclose beneficial owner information on a public database to combat money laundering.

• Deal spree: Since January, Brookfield has declared over $50B in acquisitions, nearly 3x of the transaction volumes of firms such as Apollo Global Management, EQT AB, and Silver Lake Management.

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• Perception vs. Reality: Diverging REIT cap rates highlight the growing gap between public and private market perceptions.

• Capital market revival: Jefferies (JEF) reported a second-quarter profit surpassing analysts' expectations on Tuesday, buoyed by a strong performance in the capital markets sector, despite a dealmaking slump.

• Cash crunch: Toronto's Tricon Residential, an expanding Sun Belt single-family home rental portfolio owner in the U.S., seeks to raise $452.6M via a mortgage-backed securitization offering this week.

Since the start of the year, office visits across the nation have reached a plateau, remaining at around 60% of pre-pandemic levels, as reported by Placer.ai, a traffic analytics company.

This week's metros, featuring above-average gaps between class A and BC rents, imply their sizable young populations could downgrade when student loan payments resume.

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