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April 12, 2023 | Multi-Family Rentals Feeling The Heat

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel ( Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog:

As mortgage rates have more than doubled year-over-year, defaults are spreading through the commercial property space, from offices to shopping centers and rental apartments.

A record $151.8 billion backed by US rental apartment buildings is up for renewal this year, and $940.1 billion over the next five years (Trepp data). The good news for tenants is that rents are starting to fall while mean-reverting prices suggest upcoming opportunities for future buyers and investors. For current owners, investors and lenders, the trends are not their friend. See Houston Property Owner Loses 3200 Units to Foreclosure as multifamily feels the heat:

Turmoil in commercial property markets is starting to spread beyond urban offices and aging shopping malls to rental apartments. The multifamily sector has long been considered a relatively safe investment, especially when home prices rose so much during the pandemic and forced many home shoppers to keep renting,

Landlords have benefited from surging apartment rents and cheap debt in recent years, which pushed property values to record highs. Investors paid high prices for the buildings in part because they were betting on a continued rise in rents. They also considered apartments a safer bet during a recession because people always need a place to live.

Now, the recent increase in interest rates has cooled off the apartment sector. Investors who bought properties at the peak of the market in 2021 often financed those deals with floating-rate mortgages. Many of those loans have reset at higher rates.

Real-estate analytics firm Green Street estimates that apartment-building values are down more than 20% from their peak. Meanwhile, rent growth is slowing, meaning some buildings with sizable, floating-rate mortgages no longer generate enough profits to make debt payments.

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April 12th, 2023

Posted In: Juggling Dynamite

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