The private credit markets are in crisis, according to outlets like The Wall Street Journal. While apartment owners may think they’re immune to the chaos, Danny Fishman says they aren’t.

In fact, he says the issues in the private credit market could lead to more apartment distress.

“If those funds have redemptions and have a hard time raising money because of different things that happen in different industries and their loss ratio is higher and bad debt is higher, then they will be less inclined to lend to real estate and save real estate deals,” Fishman, the co-founder and CEO of Gaia Real Estate, told Multifamily Dive.

Without private credit to provide a lifeline to owners, Fishman thinks more troubled properties will become available. “I think we are starting to see more distress in the industry,” he said. “Those [debt] funds saved them and basically they were kicking the can another year too. And I think that comes to an end.”

Fishman knows how to find troubled properties, having built his portfolio by acquiring a distressed portfolio of roughly 9,500 units out of bankruptcy with Starwood Capital Group in 2012. Since its inception, the firm has acquired more than 20,000 residential units and managed approximately $4 billion in assets, per a release shared with Multifamily Dive. 

In 2021 and 2002, when apartments were at peak pricing, Gaia sold nearly 20,000 units, Fishman said. Now that values have fallen, the firm is building its portfolio in the Northeast and Sun Belt, including three recent acquisitions in South Florida. 

“Two [of the acquisitions] came out of development, and basically we bought them out and paid the construction loan,” Fishman said. “And one we bought from a fund that was basically at the end of its life and had to sell.” 

Here, Fishman talks with Multifamily Dive about Treasury market volatility, the difficulty with underwriting development and where he sees improvements in rents.

This interview has been edited for brevity and clarity.

MULTIFAMILY DIVE: Why do you think more distressed deals will come to market?

DANNY FISHMAN: A lot of people who refinanced their properties in the last three years and put in interest reserves have exhausted the interest reserves. They hoped their interest rate would go down and the market would be stronger, but it didn’t happen.

They cannot go again with high leverage because they already went high to pay the interest reserve. If they have strong shareholders, they will do a capital call and bring equity. But I think a big portion will have to raise equity or sell or something.

How has Treasury volatility affected the market?

It's not like a financial transaction where you press a button and do the transaction. If you are buying a property or refinancing a property, it's two to three months even if you're very fast. You're entering a situation and the interest rate jumps like crazy up and down. So you can't lock, or you lock and then it moves the spread. 

Usually, the Treasury does move so much in a short period of time. There's no way to hedge it, or the cost of a hedge can jump a lot. Usually, you know what the expenses, taxes, insurance and rent will be. But you can’t underwrite the Treasury. From the time I start a deal until I close, it could cost me 1% more. You can't do an Excel on that.

How difficult is it to develop right now?

Because the interest rates are high and the market is still soft, when we check in on development, it doesn't pencil out. In some cases, even if you get the land for free, it still doesn't pencil out to build multifamily with the cost of construction and the interest rate. This will help the market recover faster and go back to rent growth. 

Unless you have to build because you have a big machine to feed, it doesn’t make sense to build if you look at the IRR.

Is the recovery taking longer than you expected?

For sure, the recovery is slower. I think the oversupply was bigger than everyone thought, so the market stayed softer. 

Then I think it is the immigration to the U.S. I'm not talking just about illegal immigration. General immigration is zero. So even people who are legitimate cannot get into the process to get a visa or green card. It's very difficult, and this was a big driver [of demand] in a lot of places. 

Do you see the high-supply markets improving?

There are specific pockets where you see that the oversupply has ended, or is toward the end, in areas like Germantown, Tennessee. We’re starting to see the market get stronger. Atlanta is stronger. Some suburbs of Nashville are still soft. In Houston, some suburbs are soft, but the inner city is stronger now. So I think it's very much dependent on the pocket. But I think that we're starting to see the market stabilizing.

What do you expect to see in your key markets next year?

New York is crazy. There's no inventory. Rents are going up and up and up. Every month I look at our portfolio, and I don't even understand how people can pay this rent. But there are no apartments. On the other end, in Austin and Nashville, people are getting two months' concessions, which is basically a 20% reduction in rent. It's market by market. 

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