How Multifamily Sponsors Can Face Down Headwinds in Today’s Market

The multifamily real estate sector is currently at a crossroads, confronted by a series of market forces that are admittedly a challenge. With the Federal Reserve’s series of rate hikes starting in March 2022, the industry is poised for a period of adjustment. Amidst this uncertainty, one thing is certain: It’s a time for creativity and innovation among multifamily owners and operators.

Understanding The Challenge

The core of the issue is this: Numerous multifamily sponsors are saddled with variable-rate loans (registration required), which have become increasingly costly as interest rates soar. A significant amount of debt is set to mature in the next few years. The Mortgage Bankers Association estimated that $728 billion will mature this year alone, and almost $660 billion will mature in 2024. Despite many having rate caps, the costs are still higher than anticipated, and for many, caps are set to expire soon (paywall). The rapid and unexpected rise in rates can leave many with compressed or, even worse, negative cash flow.

In addition to this pinch, the multifamily sector is also seeing “healthy additions to supply,” according to a report by PricewaterhouseCoopers and the Urban Land Institute. Apartment construction in the U.S. is “on pace to add over 460,000 units” this year, the report also said. I expect this could dampen occupancy rates and rent growth in some markets.

Given these challenges, sponsors are left in a position where there is a lot to carefully consider. In today’s economic landscape, a sale could potentially come at a loss, and refinancing could come with a hefty price tag, not to mention the rates could be potentially daunting. For those aiming to weather the storm until 2025, when rates might become more favorable, the question remains: How can you navigate the interim with looming debt maturities and expiring rate caps?

Innovative Strategies For “Survival”

Some sponsors, in the absence of alternative strategies, are feeling the pinch of escalating costs against diminishing revenues. This has led to capital calls to investors for additional funds and, in some cases, loan defaults, the true impact of which may only become apparent as we progress into 2024. But the story doesn’t have to be this grim if sponsors get creative.

As we navigate the complexities of the current multifamily sector, sponsors can consider and vet a range of innovative financing strategies beyond the obvious sale or refinance. For example, some might find equity swaps to be an intriguing option. If a sponsor is willing to concede some of their own general partner equity to bring in another sponsor, this capital could help manage rising costs and mitigate risks for investors.

About Real Estate Intelligent Marketing (REIM):
REI Marketing is an innovative Real Estate Marketing Company that offers distinctive real estate services to developers and multifamily investors.  We are a vibrant, dedicated team of industry professionals with international experience in marketing and multifamily investment.

STAY REAL ESTATE INTELLIGENT