Eyes Are on Rising Multi-Family Lending Risk

While much of the attention on the rise in commercial real estate risk has, for good reason, been on the troubled office-space sector, recent events are shining a light on another CRE category:  multi-family (think: apartments, condos, mixed-use buildings). 

It’s a concern nationwide  

• Multi-family commercial mortgage-backed security delinquencies are expected to more than double this year, to 1.3% from 0.62% in 2023, according to Reuters. 
• Heading into the year, over a quarter of multi-family loans in the South Atlantic region were criticized, according to Trepp. The West South-Central states (Arkansas, Louisiana, Oklahoma, and Texas) were not far behind at 22.5%. If you go by city, Houston has the highest percentage of criticized loans, at 38%.  

With such numbers in mind, Multi-Housing News recently declared that “more distress looms.”  

Why stress is rising 

The reasons can vary. In its most recent Semiannual Risk Perspective, the OCC noted that in  Phoenix and Salt Lake City plentiful luxury construction is causing “further devaluation for older properties.”  Meanwhile, in New York, tighter rent control is driving down values. In all cases, high interest rates are not helping.  

Multi-Housing News noted the plight of “investors who took out floating-rate loans over the last few years…In many cases, the investors overpaid for the assets, counting on continued robust rent growth and historically low interest rates to fuel returns.” 

We know how interest rates turned out. What we don’t know is how multi-family will ultimately impact bank balance sheets. “There are going to be a lot of eyes on the multi-family sector this year,” Trepp Research Director Stephen Buschbom said.