Beyond the Rent is Multifamily Dive’s analysis of the trends driving supply, demand and operations in the apartment industry. You can read the previous edition here.
These days, it feels like you can find a stat to support just about anything you want.
Think inflation isn’t an issue? If you watch the Sunday political shows long enough, someone probably has numbers to support that notion. On the other side, there’s probably someone who can tell you that the third-quarter U.S. real gross domestic product growth of 3.4% is a mirage.
Think Brian Schottenheimer isn’t getting enough out of the Dallas Cowboys? (Spoiler alert: he isn’t, despite this week's win.) The folks at Pro Football Focus probably have something to back those claims.
The same is true in multifamily. Since I started covering this sector, the number of studies, surveys and indexes that fill my inbox each day seems to have quadrupled … at least.
I delete most of these research projects or studies because much of this “research” is sent under the guise of pitching products. However, I do look at certain reports and even seek others out.
As more loans face issues in the apartment industry, I recently went to CRED iQ’s website to get an idea of the size of the maturity wall. There I found something that caught my eye — an article saying nearly 33% of maturing apartment debt needs a cash infusion to refinance.
At first blush, that number felt, well, kind of low, given everything that I’ve been reading about maturity walls and refinance risk.
Reading further on the CRED iQ website, I learned that the firm resized every multifamily loan in Fannie Mae, Freddie Mac and commercial mortgage-backed securities deals maturing between October 2026 and December 2028. Of that $136 billion in debt, 23% of the loans and 31% of the balance can’t refinance without an equity infusion of roughly $6.8 billion.
The good news for apartment owners is that money is available to fill that gap. The bad news: It’s getting more expensive.
Earlier this year, Maximiliane Leachman, vice chair of CBRE’s debt and structured finance group, told me refinancing is becoming harder for some borrowers. At one point, these lenders may have wanted 1% to 3% of the loan balance for an extension. Now, many could be looking for 10%.
“We’re all waiting for the shoe to drop at the end of this year as those borrowers come back for the second time to that debt fund for another modification,” Leachman said. “It will be interesting to see how many of those go back.”
But costs aren’t the only issues owners must weigh when deciding whether to bring additional capital into their deals. In a recent conversation, Michael Lynd, CEO of Kairoi Residential, raised another concern: whether refinancing is worth the cost to existing equity holders.
“The question that I have when I look at a lot of these refinances is the cost of that refinance is not great for your existing equity,” Lynd said. “If rent growth doesn’t show up in that first six to nine months or a year, then you have a chance of further impairing the equity value that isn't in place.”
Lynd thinks a lot of groups are making decisions that might not be in their investors’ best interests by holding on to properties rather than selling them because they don’t want a negative trade on their record. Alternatively, they may want to delay a sale to raise additional capital.
“I see it happening all over the place,” Lynd said. “You can get a loan, but should you take that loan? Is that the best risk-adjusted decision for your equity?”
If the answer is no and if the market doesn’t snap back, those firms might be doing their investors a disservice. Still, some owners may find data showing refinancing is the best option. And it could be.
But just because you can find the data to say something doesn’t make it so.
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