Rent and Operating Trends – Week of August 6th 2023

A wave of multifamily maturities has been building for the better part of three years. Loans originated in late 2020 and 2021, held historically low initial interest rates, and experienced some of the fastest rent growth in history during their first year. While economic and multifamily fundamentals have changed, beginning in late Q1 2022, there was little concern for the value of multifamily assets until early this year. The speed and consistency with which interest rates rose surprised many. We began analyzing the impact of rising interest rates on floating rate debt in a paper published in April. But only now, a few months before the initial loans from late 2020 come due, is this becoming a major story outside our industry. Today’s Wall Street Journal ran an article looking at the volume of loans coming due in the next few years and the impact higher rates will have on valuations. Other major media outlets are starting to cover foreclosures in markets including San Francisco, Houston, and Los Angeles. Some metros are performing better than others from an operational perspective; however the impact of rising rates will hurt all markets, and very few if any will escape unscathed over the next 18 months. Multifamily loans with fixed rate debt will perform significantly better and are positioned to potentially weather the storm, but floating rate debt and the properties that are financed with it will feel the brunt of the pain from falling valuations. 

Multifamily fundamentals had a decent week last week, with occupancy and ATR improving, while traffic and leasing were flat and NER declined modestly. Historically, operating metrics oscillate in the third quarter, before declining steadily in the fourth quarter. I expect this year will follow a similar trend and the next few months will show some upward and downward movement, but an overall flat outcome.