Multifamily Market: Awaiting Distress That Hasn’t Arrived

Corinthian Asset Management - Multifamily Market - Awaiting Distress That Hasn't Arrived

Rising interest rates and maturing loans were expected to trigger a wave of distress in the multifamily real estate market. However, despite these headwinds, a widespread collapse has yet to materialize. This article explores the current market conditions and the strategies employed by investors and lenders in this environment.

While some anticipate a flood of discounted properties, John Manwaring, CEO of Neighborhood Ventures, has recently launched the Arizona Multifamily Opportunistic Fund with the intention of capitalizing on distressed assets. However, such opportunities have been limited. While some properties are trading below intrinsic value, a market-wide crisis is not reflected in current pricing.

The concept of “extend-and-pretend” has re-emerged. This strategy, where lenders extend troubled loans to postpone defaults, proved effective during the Global Financial Crisis in mitigating widespread distress and bank losses. Similar hopes exist among some investors for a repeat scenario, envisioning a surge of distressed properties available for acquisition at significant discounts.

However, unlike the post-2008 environment, many property owners and lenders are opting for loan extensions to avoid defaults. This is leading to a scarcity of distressed sales, constraining the opportunities for investors seeking deeply discounted assets.

The current market, then, presents a mixed picture. Pockets of distress do exist, offering possibilities for targeted investors like John Manwaring. Yet, a broader market downturn, reminiscent of the expectations following 2008, has not come to pass.

Looking ahead, 2024 might see a shift. With the potential for fewer loan extensions and more loans reaching maturity, coupled with a higher interest rate environment, distress in the multifamily market could increase. However, for now, the market seems to be navigating the challenges with a degree of resilience.