Q&A With Affinity | Multifamily Versus Debt

NAI Affinity
August 9, 2023

Client Question:

I saw the following headline “A surge in debt costs threaten to wipe out many apartment building owners across the U.S.” and was wondering what you are seeing. I know this is a problem for several CRE asset classes, but I was surprised that apartments are seeing the same issues.

- Hedge Fund Executive

NAI Affinity's Answer:

“There is not a clear answer to this question that easily encapsulates every multifamily asset. It depends. What we are seeing is that this headline speaks more of broader CRE issues at hand today rather than apartment specific (e.g. far worse in office) issues. Differentiating factors for multifamily assets and determinants of their resilience in the market include:

1. Geography;

2. Local market conditions;

3. How deals were underwritten, financed, and appraised; and

4. Lender business practices and outlook (are they predatory or cooperative in the short term).

A recent example of this headline ringing true for multifamily was a big owner of apartments in San Francisco who had a portfolio due for refinance at the wrong time. It was a short-term loan, and they had maxed the loan amount over the debt coverage ratio previously. They did not have the cash to cover the new equity requirement, so in short, it can happen to multifamily assets, but it is much more rare.

Big picture for multifamily: People are opting not to sell their houses because their mortgage rates are far below what they would get for a new mortgage today. Combined with the fact that the population is still growing in many places, we still need a lot of housing supply. Questions we ask ourselves when evaluating markets include the following: Where is new household formation taking place? In those places, where are people going to live? Can they afford to buy a house or condo at current interest rates? What does the local supply and pipeline of apartments look like?

Locally, we are seeing softer market conditions in Greeley, where there is more new supply (fewer barriers to entry) and corresponding increases in leasing incentives, versus Fort Collins where there is less supply than demand. Barriers to entry, primarily driven by local policies, cut both ways politically. Increased regulation and barriers to entry tend to drive rents higher. On the other hand, “easier” development policies can make it “too easy” and flood the market with supply.”

- Ryan Schaefer (CEO) and Brecken Schaefer (Project Manager / Real Estate Analyst), NAI Affinity

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