Why Multifamily CRE Risk Is Rising

Despite all the attention on struggling office properties, banks shouldn’t overlook mounting stress in another CRE sector: multifamily. Distress levels in this category rose about 9 percentage points over the past year, reaching 46% as of February 2025, according to Tom Cronin, product manager at Automated Financial Systems (AFS) and longtime lead on RMA’s Credit Risk Navigator database, which benchmarks $1 trillion in commercial exposures. 

Cronin points to oversupply as a key driver. Developers expected strong demand for apartments as single-family homes became more expensive, but many of the new projects targeted the upscale market. Inflation and rising rents left those units out of reach for many renters, and “vacancies have been extremely high,” Cronin says. 

Hotspot states include Texas (63.2% of multifamily loans are now distressed), Arizona, and Colorado. Credit quality for apartments has also declined sharply in New York and the Northeast more broadly. 

What To Watch: Early Indicators of Risk 

Cronin advises banks to look beyond traditional performance metrics like delinquencies. Two practical early warning signs stand out: 

• Vacancy rates. “An increase in vacancy is a leading indicator of forthcoming trouble,” Cronin says. 

• Loan modification requests. These often signal emerging cash flow issues—even if the loan is still current. 

Next Steps for Risk Teams 

Even if borrower-level data looks stable, Cronin encourages banks to stay proactive. “Now is a good time to conduct a property-by-property evaluation—especially for properties with higher risk ratings,” he notes. Adjusting lending limits by both property type and risk rating can also help. For example, multifamily loans rated “average” might warrant a lower cap than higher-rated retail properties. 

Read more from Cronin in the Q&A.