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Towards the back end of last year, I found myself wondering on more than one occasion why I hadn’t seen more activity in the distressed commercial real estate market. Indeed, I wrote a blog post about it in January.
There certainly seemed to be plenty of opportunity in the space at the time. And there may be still; however, the opportunity might already be shrinking in the commercial space.
What I’ve got my eye on now is the multifamily space. Trepp’s latest CMBS Delinquency Rate shows multifamily property as having the highest ‘growth’ since April (up 67 basis points) when compared to industrial, lodging, office and retail. While the multifamily delinquency rate is still comfortably the lowest of the five categories that Trepp tracks, it is now at a three-year high, and the gap to the others is closing.
It must be said that Trepp’s report says that ‘For context, there was a large multifamily loan that accounted for north of 54% of the property type’s newly delinquent total. This was a portfolio loan that had previously been current on payments but now shows a delinquency status of non-performing matured balloon’.
Still, we all know about the effects of higher interest rates on commercial real estate. However, insurance cost increases are another issue that, along with leverage, compounds the effects on multifamily assets.
There has been talks of these costs peaking in recent months and thus starting to show signs of relief. Additionally, there are companies like Rezysave that are helping offset those costs with proprietary technology and optimized operations.
Still, the delinquency rate is on the up. And, while I’m very aware that not every commercial real estate loan is bundled into a CMBS (not even close, I know), the trend is one worth watching.
The US economy has been remarkably resilient since interest rates began to rise towards the end of 2022. The good news for the US consumer is that inflation has somewhat normalised – the 2.9% rate seen in July is the lowest since March 2021 – but the jobless claims data released in early September shows an economy that has a higher unemployment rate (4.2%) than observed in August last year (3.8%), and a higher number of unemployed people (7.1 million versus 6.3 million). Credit card debt was up $27bn in Q2 to a total of $1.142trn.
A cynic would say that the impact of higher interest rates is finally being felt by the American consumer. It seems that they could do with the Fed lowering rates when it next meets on September 17-18. So could plenty of private markets asset managers who are competing for allocations with attractive liquid fixed income investments. And so could multifamily investors who could do with refinancing at lower rates.
The office real estate market has certainly had a tough time of it in the past year or so. It looks like there could be a similar challenge in the multifamily space – although, for distressed real assets investors, there could be more opportunities to snap up some bargains in the coming 12-18 months.
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Gregory Poapst is a Managing Partner at Fundviews Capital. Connect with him on LinkedIn here.
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