{"id":185508,"date":"2025-11-05T12:36:57","date_gmt":"2025-11-05T19:36:57","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=185508"},"modified":"2025-11-05T12:37:01","modified_gmt":"2025-11-05T19:37:01","slug":"rising-vacancies-and-rent-pressure-makes-multifamily-credit-risky","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/rising-vacancies-and-rent-pressure-makes-multifamily-credit-risky","title":{"rendered":"Rising Vacancy + Rent Pressure: Why Multifamily Credit Markets Are Turning Risky"},"content":{"rendered":"\n

This article is presented by <\/span>Connect Invest<\/span><\/a>.<\/span><\/em><\/p>\n\n\n\n

U.S. <\/span>commercial real estate<\/span><\/a> is under mounting pressure as vacancy rates hit record highs\u2014first in offices, and now creeping into <\/span>multifamily<\/span><\/a> and industrial properties. <\/span>A decade of cheap capital and aggressive development has caught up <\/span>to<\/span> landlords <\/span>facing slower<\/span> rent growth, <\/span>higher<\/span> refinancing<\/span><\/a> costs, and <\/span>rising delinquencies<\/span> across several sectors.<\/span> Moreover, both commercial and residential real estate <\/span>is<\/span> undergoing profound changes as large metro areas <\/span>cease to be<\/span> automatically attractive as job destinations.<\/span><\/p>\n\n\n\n

Why are multifamily markets turning risky, and what strategic changes can investors make to mitigate the risks and protect their margins?<\/span><\/p>\n\n\n\n

Warning Signs for Commercial Real Estate<\/span><\/h2>\n\n\n\n

According to <\/span>CBRE<\/span><\/a>, total investment volume <\/span>is still expected<\/span> to rise roughly 10% this year to $437 billion, but much of that activity <\/span>is concentrated<\/span> in distressed sales and recapitalizations. Meanwhile, the <\/span>Mortgage Bankers Association<\/span><\/a> reports that delinquencies ticked up across lodging and industrial assets in Q1 2025, signaling stress that could spill into housing credit next.<\/span><\/p>\n\n\n\n

The market segment that is most obviously ailing is the commercial office segment. According to a press release from <\/span>Moody’s Analytics<\/span><\/a>, the vacancy problem faced by the office real estate market is severe enough to signal a \u201cstructural disruption rather than a temporary downturn for the multitrillion-dollar sector.\u201d <\/span><\/p>\n\n\n\n

Office vacancy rates in major commercial hubs, notably San Francisco and NYC, have reached unprecedented levels (27.7% and 23%, respectively) as of the second quarter of 2025, according to recent Moody\u2019s data. The pre-pandemic vacancy rate in San Francisco was just 8.6%.<\/span><\/p>\n\n\n\n

The decline of office space vacancy is creating a tense situation for owners-investors and commercial building landlords. They are facing refinancing problems with lenders, who are increasingly viewing this type of investment as risky. <\/span>This problem <\/span>is exacerbated<\/span> by the fact that many lenders of commercial space loans are smaller regional banks, which are even more likely to make these lines of credit more expensive <\/span>in order<\/span> to protect themselves <\/span>from increasing<\/span> default <\/span>activity<\/span>.<\/span><\/p>\n\n\n\n

Adaptive reuse, aka apartment conversions, may solve part of the problem, <\/span>with<\/span> some success stories. <\/span>However, this <\/span>too<\/span> is risky, since converting office spaces into apartments is fraught with structural and legal challenges.<\/span> <\/span><\/p>\n\n\n\n

Multifamily Markets in Trouble<\/span><\/h2>\n\n\n\n

The most obvious answer for investors considering pivoting away from office space is multifamily real estate. But is investing in apartment new builds as safe a bet as it once was?<\/span><\/p>\n\n\n\n

There are indicators that the multifamily market\u2014long considered the safest corner of real estate\u2014now faces its own headwinds. A wave of new apartment supply, softening rent growth, and stubbornly high interest rates have compressed margins for developers and owners alike. For lenders and investors, that means reevaluating credit exposure and shortening duration risk.<\/span><\/p>\n\n\n\n

After nearly a decade of rent growth turbocharged by the surge in demand during the pandemic, the multifamily market is stagnating, with <\/span>growth of just 0.2%<\/span><\/a> recorded this year, according to RealPage numbers. The multifamily building frenzy in response to unprecedented <\/span>demand for housing<\/span> in popular relocation areas like the Sunbelt has finally caught up with this segment of the market. <\/span><\/p>\n\n\n\n

The situation is unlikely to improve in 2026 and beyond; with interest <\/span>rate decreases<\/span> to below-6% levels on the horizon, many renters will inevitably become homeowners in the coming years. <\/span><\/p>\n\n\n\n

These are normal market fluctuations that inevitably result from supply-and-demand imbalances and economic ups and downs. <\/span>However, what investors must understand going forward is that <\/span>there are<\/span> larger shifts at play <\/span>here<\/span>\u2014they are societal, not merely <\/span>economic<\/span>, and likely to be permanent.<\/span> <\/span><\/p>\n\n\n\n

The fates of the office <\/span>market<\/span> and multifamily <\/span>segments<\/span> are profoundly <\/span>interlinked<\/span>.<\/span> Both are suffering from a historic shift in how Americans work, and what is happening to urban areas as a result. <\/span><\/p>\n\n\n\n

A substantial majority of people are no longer prepared to <\/span>simply<\/span> rent an apartment close to <\/span>where<\/span> their office <\/span>is<\/span>; they no longer have to.<\/span> Renters actively choosing multifamily developments are now likely doing so for other reasons, <\/span>like<\/span> great amenities or a walkable <\/span>and<\/span> exciting downtown area, where they can enjoy life outside work.<\/span> <\/span><\/p>\n\n\n\n

Refining Your Portfolio Is Key<\/span><\/h2>\n\n\n\n

A multifamily investor\u2019s biggest concern is no longer so much falling rents as uncertainty about long-term occupancy prospects.<\/span><\/p>\n\n\n\n

The most obvious solution here is <\/span>refining<\/span> one\u2019s portfolio-building strategy and <\/span>shortening<\/span> debt duration whenever possible.<\/span> What does refining mean here? <\/span><\/p>\n\n\n\n

Think of <\/span>the<\/span> multifamily investing <\/span>of<\/span> years past as a blunt tool: <\/span>You<\/span> go wherever rents are currently <\/span>the<\/span> highest.<\/span> Now, however, selecting where to invest requires a detailed understanding of <\/span>the overall health of<\/span> a specific metro area.<\/span> What does it have to offer renters in the long term? <\/span><\/p>\n\n\n\n

A more refined portfolio cherry-picks multifamily investments that offer the best longitudinal occupancy rates. <\/span>Going forward<\/span>, this will be the best way for investors to mitigate risk, secure favorable financing, and protect their margins. <\/span><\/p>\n\n\n\n

Simply chasing rent growth <\/span>just<\/span> won\u2019t <\/span>do<\/span> as a viable investment strategy in 2026.<\/span> It\u2019s all about choosing lower-risk, shorter-term investments in locations where multifamily real estate remains attractive for a plethora of reasons\u2014not just the one reason (high rental yield) that was good enough circa 2019.<\/span><\/p>\n\n\n\n

Connect Invest <\/span><\/h2>\n\n\n\n

This<\/span> is <\/span>exactly<\/span> where <\/span>Connect Invest\u2019s Short Notes<\/span><\/a> come in. By funding diversified, short-term real estate debt investments, investors can earn fixed, high-yield interest while limiting exposure to long-horizon vacancy and rent risk. Connect Invest\u2019s underwriting process actively stress-tests each project against occupancy and income fluctuations\u2014so even if vacancies rise or rents fall, investor returns remain stable.<\/span><\/p>\n\n\n\n

Instead of worrying about the <\/span>next<\/span> vacancy report, investors can keep their capital moving\u2014and their returns steady\u2014with <\/span>Connect Invest\u2019s data-driven approach<\/span><\/a> to short-term real estate credit.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

This article is presented by Connect Invest. U.S. commercial real estate is under mounting pressure as vacancy rates hit record highs\u2014first in offices, and now creeping into multifamily and industrial […]<\/p>\n","protected":false},"author":613618,"featured_media":185504,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[8],"tags":[],"class_list":["post-185508","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-trends"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/185508","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613618"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=185508"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/185508\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/185504"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=185508"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=185508"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=185508"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}