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An excerpt from the article “A Real-Estate Haven Turns Perilous With Roughly $1 Trillion Coming Due” in the Wall Street Journal this week.
---“Apartment buildings, long considered a real-estate haven, are emerging as the next major trouble spot in the beleaguered commercial-property world. Investors bid up the prices of multifamily buildings for years, attracted by steadily rising rents and the prospect of outsize returns. Many took on too much debt, expecting they could raise rents fast enough to pay it down. Unlike office buildings and malls, which have been hit hard by remote work and e-commerce, rental apartments have low vacancy rates. The apartment sector’s main problem isn’t a lack of demand—rents have soared since 2020—it is interest rates.
---The sudden surge in debt costs last year now threatens to wipe out many multifamily owners across the country. Apartment-building values fell 14% for the year ended in June after rising 25% the previous year, according to data company CoStar. That drop is roughly the same as the fall in office values. Many apartment-building investors took on too much debt, expecting that they could raise rents fast enough to pay it down. Mortgage delinquencies in the multifamily category are low but increasing. Borrowing costs have doubled, rent growth is slowing and building expenses are rising. Data provider Trepp earlier this year identified one type of rental-apartment debt as accounting for a large share of the commercial mortgages at risk of default. Apartment landlords face a “hydrogen-bomb scenario,” said Peter Sotoloff, a veteran real-estate finance executive, a former founding member of Blackstone’s property debt business and former managing partner at Mack Real Estate Credit Strategies.”
---Affordable Housing occupies a special place as an asset class because historically it has been more immune to the ups and downs in the market mainly due to subsidies at the local, state, or the federal level that provide advantageous financing and below market interest rates. That is good news for buildings currently in service, but for new development it poses significant challenges. The availability of state, local, and other financing sources to fill the development gaps will be increasingly more important. For buildings currently in service, the effects of inflation are seen in the LIHTC industry mainly in higher construction and operating costs at developments.
---One way to help offset these market forces is to perform an audit of the utlity allowances within your portfolio. We have had great success reducing these allowances for owners which, in turn, means they can potentially charge incrementally more in rent. Hedgerow Partners can assist you in this. Please contact us today if you are interested in exploring further.
Link to Full Article Below
https://www.wsj.com/articles/a-real-estate-haven-turns-perilous-with-roughly-1-trillion-coming-due-74d20528?mod=Searchresults_pos1&page=1
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