What Happened? An Analysis of the Multifamily Meltdown
10 Replies
- 3yMichael E.Pro MemberNew to Real Estate 路 Saginaw, MI 路 Member since 2021 路 99 posts 路 115 votes
The link for the book store actually goes to a different article. Here is the right link to the book.
https://store.biggerpockets... - Providence, RI 路 Member since 2018 路 17 posts 路 27 votes3y
When Interest rates go from 3.5% to 8.5% in 1 year on commercial loans where banks reset their rates every 5 years, you have to double your income (rents) now to make up for it in 2-4 years when they reset, otherwise you will end up like Paul's story, out of convenance or even default. The problem is when you build new, there is not much to improve to bring up rents... The double whammy is if your paid a high price for the property that was recorded by the city, then they increase your property taxes significantly!! That happened to me... I bought a MF with $29000 in property taxes, and they increased it to $61,000 because the city saw how much I paid for it! How do you argue the rate, when they are just matching what you paid... it's going to get tough out there.
- Benson, NC 路 Member since 2019 路 133 posts 路 3 votes3y
I agree with almost everything in the article. At this point, however, I've not seen the firesales yet. I'm primarily a SFH guy here in central NC ... but am open to small commercial or notable MF/Apartment options. I've seen some small drop in prices, but certainly no firesales yet.
- 3yRob BeemanPro MemberSpecialist 路 Philadelphia, PA 路 Member since 2010 路 302 posts 路 118 votes
Unfortunately I agree with this article. I used to shake my head at the under-qualified operators that would over-pay for multifamily assets and seem to make more revenue from acquisition fees, disposition fees and fund management fees than actual profits from cash flows of the asset. Then they would sell that asset to another under-qualified operator that made their money in the same manner (fees on the front end, or back end, but rarely from operations). Sad that the people that will get most hurt may likely be the passive investor(s), the limited partners (LP's) as they may be blindsided when the loans go into default that the operators have against the assets, if the General Partner (GP) hasn't been transparent with the LP's. Also sad that some operators may choose to raise new capital to try to bail out the sinking asset (causing more LP's to take a hit). Much of what is happening hasn't hit the news yet.......but will in time.
- Scranton, PA 路 Member since 2017 路 15 posts 路 8 votes3y
ZIRP (zero interest rate policy) causes people to move out on the risk curve because they can't get any yield on bonds or bank accounts, which leads to malinvestment, which inevitably leads to where we're currently at.
The Fed will almost certainly pivot as they always do and drop rates to zero or possibly negative while cranking up QE (buying junk from banks so they have cash). However, this doesn't mean banks will be lending.
Just because prices drop won't necessarily mean it's time to invest. You have to look at the entire macro picture, not just your local market or real estate in general. In the 1970s, asset values increased in nominal terms, yet decreased in real terms. Commodities did much better; and I would argue are a lot easier to manage than real estate.
- Member since 2023 路 1 post 路 0 votes3y
After reading Brian Burke's book, I reached out to Praxis capital to see whether there were open syndications going. This would've been a couple months ago. When I spoke to their team, I was told that they were on the side lines for now due to market conditions. In reading this, looks like those chickens have come home to roost.
- Investor 路 Cary, NC 路 Member since 2012 路 218 posts 路 196 votes3y
This headline sounds more alarming then even yahoo.com or other clickbait headlines. Meltdown... really? Let's take the worst case scenario and extrapolate to the whole industry and then sure I guess we are in a meltdown...
I am LP or GP in ~20 multifamily deals currently and they are not melting down so did I just not get the memo?
- Member since 2026 路 14k+ posts 路 5 votes3y
Dan: I see your point. The problem is not just with those that have stopped distributions, done capital calls, or lost assets back to the bank. The problem extends to those who have some trouble but will melt down completely with another interest rate hike or two. I think it is real. Here are a few quotes from CRE Daily 6/23/23:
The anticipated tidal wave of troubled CRE assets is nearing reality. The number of troubled assets rose 10% to almost $64B in the first quarter, with an additional $155B of potentially troubled loans on the horizon, according to a report from MSCI Real Assets.
A world of hurt: Skyrocketing borrowing costs have hammered the commercial real estate sector, driving down prices and pushing some investors into default. A significant portion of this looming distress is connected to properties needing refinancing during a period where lending conditions have become stringent following the failure of numerous regional banks.Multifamily distress: Despite high demand, even the multifamily sector can't escape financial woes. The CMBS delinquency rates for multifamily loans within significant investment groups rose to 3% at the end of Q1, a jump from 2.9% at Q4's end and 2.77% in Q3, as per the Mortgage Bankers Association's reports.
Originally posted by Paul Moore.
- Rental Property Investor 路 Albertville, AL 路 Member since 2016 路 20 posts 路 6 votes3y
Great article. Sad but true. I have heard many Newby Gurus say... "Anybody can do it". I cringes.
They profusely promoted the upside, but you never heard them talk about the risks. Many inexperienced wannabes jumped in and pushed prices through the roof paying stupid money for property. In my career, I've worked as a CRE lender, a CRE appraiser, a general contractor, an apartment developer/investor/syndicator (before it was hip) and an apartment property manager. I've seen many real estate cycles and fought through many RE problems. I often expressed my concern to young brokers and investors. I think they just thought I was old. You can not ignore basic real estate principles and risk management. In the financing world there is a pendulum that swings between sales and credit. When the market is good, the banks push sales, ease credit requirements, back off on their loan structures and lower their interest rates. When the market changes, the credit guys step in and quickly tighten up credit requirements, loan terms, interest rates and exposure limits. It happens... its happening now. You had to know that interest rates were going back up. And when interest rates go up, cap rates go up and values go down. The cap rates and purchase prices were not sustainable. You have to be prepared for changes in the market... especially when you're spending someone else's money. - Real Estate Agent 路 Seattle, WA 路 Member since 2017 路 224 posts 路 55 votes3y
word. what he said.馃憤
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