The recent default of Houston apartment-building investor, Applesway Investment Group, has raised concerns about the impact of rising interest rates on real estate investments. The company borrowed nearly $230 million to purchase four separate apartment complexes with more than 3,200 units during the pandemic. However, the rising interest rates forced Applesway to default on its loans, leading to the foreclosure of the properties by Arbor Realty Trust. New York-based Fundamental Partners reportedly purchased the Houston properties for below the value of the loan.

The default of Applesway Investment Group has highlighted the risks associated with investing in real estate, particularly with floating-rate mortgages that are subject to changes in interest rates. As the Federal Reserve continues to raise interest rates to curb inflation, investors in floating-rate mortgages are likely to face higher borrowing costs, which could lead to defaults and foreclosures. However, despite these risks, rising interest rates can also create buying opportunities for investors in the long run, particularly as bridge loans and rate caps bought in 2020-2022 mature.

One of the main reasons why rising interest rates can create buying opportunities is that they tend to reduce the competition for real estate investments. As the cost of borrowing increases, many investors may choose to pull out of the market or delay their investments, leaving more opportunities for those who are willing to take the risk. Additionally, rising interest rates can also lead to lower property prices, as some investors may be forced to sell their properties to pay off their maturing debts. This can create attractive buying opportunities for investors who have the financial resources to weather short-term fluctuations in the market.

While the default of Applesway Investment Group highlights the risks associated with investing in real estate, particularly with floating-rate mortgages, rising interest rates can also create buying opportunities for investors in the long run. As bridge loans and rate caps bought in 2020-2022 mature, investors with the financial resources to weather short-term fluctuations in the market may be able to take advantage of lower property prices and higher returns on investment. 

In conclusion, our team is eagerly anticipating the buying opportunities in the multifamily market caused by rising interest rates and maturing loans. We are proactively taking steps to position ourselves for success by strengthening relationships with our key principals so we are confident that we’ll still have access to debt even when and if banking lending standards tighten. We are also maintaining our relationships with our passive investors to ensure we have fast access to equity for the right opportunities. Moreover, we are making sure that our underwriting policies are sound and conservative. I always stress to my team that we need 6-8 months of operating reserves in our underwriting to help mitigate risks like what I mentioned above.  In addition, we are working with an asset manager who has experience managing multifamily properties during downturns to help us navigate any potential challenges. We also have experienced boots on the ground team members so we can continue to specialize our familiarity with our markets street by street. Lastly, we are actively talking to every broker and apartment owner in our markets so we can see every multifamily opportunity that meets our criteria and that other groups may not have access to.