It might seem like a great time to own apartment buildings. For many landlords, it is. Rents have soared in recent years because of housing shortages across much of the country and a bout of severe inflation.
But a growing number of rental properties, especially in the South and the Southwest, are in financial distress. Only some have stopped making payments on their mortgages, but analysts worry that as many as 20% of all loans on apartment properties could be at risk of default.
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Although rents surged during the pandemic, the rise has stalled in recent months. In many parts of the country, rents are starting to fall. Interest rates, ratcheted higher by the Federal Reserve to combat inflation, have made mortgages much more expensive for building owners.
And while homes remain scarce in many places, developers may have built too many higher-end apartments in cities that are no longer attracting as many renters as they were in 2021 and 2022, like Houston and Tampa, Florida.
These problems haven’t yet turned into a crisis, because most owners of apartment buildings, known in the real estate industry as multifamily properties, haven’t fallen behind on loan payments.
Only 1.7% of multifamily loans are at least 30 days delinquent, compared with roughly 7% of office loans and around 6% of hotel and retail loans, according to the Commercial Real Estate Finance Council, an industry association whose members include lenders and investors.
But many industry groups, rating agencies and research firms are worried that many more apartment loans could become distressed. Multifamily loans make up a majority of loans newly added to watch lists compiled by industry experts.
“Multifamily is not coming up and punching you in the nose right now, but it’s on everyone’s radar,” said Lisa Pendergast, executive director at the real estate council.
The worries about apartment loans add to a litany of problems facing commercial real estate. Older office buildings are suffering because of the shift to working from home. Hotels are hurting because people are taking fewer business trips. Malls have been losing ground for years to online shopping.
The issues facing apartment buildings are varied. In some cases, owners are struggling to fill units and generate enough income. In others, the apartments are full of paying tenants, but owners cannot raise rents fast enough to come up with the cash to cover rising loan payments.
As a result, almost 1 in 5 multifamily loans is now at risk of becoming delinquent, according to a list maintained by the data provider CRED iQ.
Analysts are most worried about the roughly one-third of multifamily mortgages that were issued with floating interest rates. Unlike typical, fixed-rate mortgages, these loans have required rising payments as interest rates have climbed in the last two years.
