All the talk in multifamily circles in 2023 and throughout 2024 has been about the impending “maturity wall” of loans set to expire. This wall, many have said, would stir up a wave of distress that would create “generational buying opportunities” from the fallout of the overleveraged, floating-rate acquisitions and new developments delivered at the top of the market.
How has that played out? Buying opportunities haven’t yet materialized, and the multifamily investment sales market remains flatlined.
How can that be given the record number of trades at the top of the market across the Southeast? Debt maturation trends are evident in investment sales recorded between 2019 and 2022. According to CoStar, an average of approximately $78 billion in transaction volume occurred in the region in 2021 and 2022, compared with just $38 billion in 2019.
It’s simple. Due to a combination of “extend and pretend” by lenders and the runway from preferred equity lifelines, owners who acquired assets at the top of the market have been able to kick their losses down the road by about 12 to 24 months.
However, we expect that to change dramatically as we head into 2025. We believe that lenders will force sales, owners will be unwilling and/or unable to throw good money after bad, and developers (or the equity behind them) will recognize now is the best time for them to sell.
Why do we believe this? Let’s look at two common scenarios that are unfolding throughout the Southeast.
The Peak-Value Buyer
A buyer acquired a value-add asset in late 2021 for $90 million at an approximate cap rate of 3.5 percent.
That buyer financed it with three-year, floating rate debt at 65 percent loan to value (LTV), which is approximately $58.5 million in addition to $9 million of preferred equity, or approximately 75 percent of the acquisition cost.
Despite increasing NOI by about 15 percent, cap rates have expanded to about 5 percent, and the property today is worth roughly $73 million. That means approximately $17.5 million, or 78 percent, of the $22.5 million in equity is wiped out.
Given the rise of interest rates and tightening of credit standards, lenders today will only finance around $49.5 million, so the owner must come up with $9 million at refinance or face foreclosure.
The loan is set to mature, and the lender is unwilling to work with the borrower. There’s likely an extension option, but with that often comes debt yield/debt service coverage ratio (DSCR) tests and expensive interest rate cap requirements with no guarantee of a performance turnaround.
Most owners do not have the track record to ask for multiple rounds of capital infusion that are likely needed to extend maturity. Most owners will likely decide that a sale is their best course of action.
Let’s look at another scenario.
The New-Development Merchant Builder
A merchant builder delivered a property in 2023 or 2024 which is currently around 75 percent or less leased.
Their all-in basis is well below today’s replacement cost given the timing of the development, which started in 2020, allowing them a break-even sell or a modest gain today.
The developer has a construction loan as well as preferred equity, which is eating into their potential profits.
Time is money, and they are highly motivated to sell sooner rather than later.
In both scenarios, the best course of action for the owner is to sell today.
Industry Leaders Signal Increasing Investor Appetite
Going-in cap rates from the past 12 months are solidly in the 4.75 to 5 percent range for high-quality assets. Additionally, institutional capital is coming off the sidelines, and the data is providing a strong case for limited supply and ample demand over the next few years.
Ric Campo, CEO of Camden, has suggested the acquisition market will ramp up in 2025 to 2026 as merchant builders move to unload a heavy volume of recent lease-ups, and banks nudge borrowers to sell as values rebound. Campo noted this on the publicly traded REIT’s third quarter earnings call, saying:
“We think [2025 and 2026] are going to be really interesting years. You have $650 billion worth of multifamily debt coming due. You have merchant builders who have preferred equity that are eating into their profits. Banks who want their loans paid down. And so there will be, I think, a very robust transaction market over the next couple years.”
Dan Oberste, president and chief executive officer of BSR, a Sun Belt-focused REIT, also referenced a similar dynamic on the third-quarter earnings call, saying:
“While we did not acquire an asset in the third quarter, as expected, we saw increased opportunities, just not the right opportunity. We will remain patient and disciplined with our unitholders’ capital and look forward to seizing acquisitions when appropriate in the near future. The gazelle that we’re hunting right now is the new construction lease-up.”
Noting these dynamics, we believe transaction volume is going to increase significantly in 2025, kicking off with the 2025 NMHC Apartment Strategies Conference in Las Vegas on Jan. 28. At Atlas, we are prepared to take advantage of select, unique opportunities this coming year.
— Joe Stampone is the managing director of investments of New York City-based Atlas Real Estate Partners. He can be reached at stampone@atlasrep.com