Multifamily Distress Next Headwind for CRE, Short Seller Says

The commercial real estate industry, still hurting from battle wounds delivered to the office sector during the COVID-19 pandemic, may soon be facing more trouble.

Short seller Carson Block, CEO of Muddy Waters Capital, told Bloomberg that the source of the trouble is the many loans tied to the acquisition of apartment complexes with cheap floating-rate debt prior to 2022, after interest rates were cut to near zero at the start of the COVID-19 pandemic. The Federal Reserve aggressively raised interest rates to their highest level in 22 years from March 2022 to July 2023 before cutting rates by 75 basis points late this year.

“A lot of multi-unit residential in the U.S. — particularly in the Sun Belt — is in trouble,” Block told Bloomberg in a story posted Thursday morning. “That’s the shoe that hasn’t really dropped yet, but that we think will.”

Block said many multifamily properties were already selling at capitalization rates below zero prior to the COVID-19 pandemic.

Nearly $76 billion of multifamily loans are now at risk of distress, Bloomberg reported, citing data from MSCI Real Assets. 

Much of the concern around multifamily distress from falling rents centers around the oversupply in the Sun Belt, the region that accounted for roughly two-thirds of all U.S. multifamily transactions from 2020 to 2023, Commercial Observer previously reported citing Yardi Matrix data. The Southern U.S. gained 673,000 new apartment units between 2021 and 2023 amid pandemic-induced immigration trends during that period, according to Yardi Matrix. 

Pressures confronting Sun Belt multifamily properties have weighed heavily on Arbor Realty, an active lender in Southern apartment assets. The mortgage real estate investment trust reported 16 nonperforming loans in the fourth quarter of 2023 largely attributed to floating debt issued on Sun Belt multifamily properties before 2022. 

Andrew Coen can be reached at acoen@commercialobserver.com