When fighting the potential economic collapse of the pandemic turned into a zero interest rate policy, the result fanned commercial real estate development in all ways, shapes, and forms. One of them was multifamily syndicators, according to Trepp. “[M]ultifamily syndicators increased their rate of acquisitions considerably, often with a value-add strategy,” wrote author Emily Yue.
She continued: “These syndicators frequently relied on floating rate loans at low-interest rates with the hope that these properties would stabilize quickly after renovations were made and that rents would increase in a market with supply-and-demand dynamics leaning in their favor.”
Which worked at the time and might have continued to so long as the cheap money and high leverage continued to allow deals to pencil on refinancing. Except, as everyone in the industry is painfully aware, they didn’t. Values have fallen, cap rates gone up, and for many projects ongoing cash flows could not keep pace with rising interest rates — particularly variable — and carrying costs that have become nearly as burdensome.
As with so many others in the industry, the syndicators have one of three options: chase additional capital to refinance at much lower leverage (while reducing their own return), sell a property to get out from under although probably at some loss, or turn the keys back over to the lenders. And according to Trepp, many of the floating-rate loans are coming due in the near future.
“The Trepp team used TreppLoan to examine the loan exposure for five multifamily syndicators that saw significant growth over the last few years,” Yue wrote. “Across the five syndicators Tides Equities, GVA Investments, Nitya Capital, ZMR Capital, and Rise48 Equity, a total of $3.6 billion in multifamily commercial real estate (CRE) loans with maturities of 30 months or less reside in CRE collateralized loan obligations (CRE CLOs).”
Across the five, the amount fixed loan balance is $154.3 million. But that is only 3.7% of the total loan balance. The remaining 96.3% is floating rate worth almost $4.1 billion, with a weighted average debt service coverage ratio of 1.04 — something most lenders wouldn’t consider as stable enough.
The numbers get more tenuous when broken out by source type. About 11.9% of the total balance is in CMBS, some of which is fixed and some floating rate. The remaining 88.1% is all CRE CLO, which Trepp says are all floating rate with a weighted average DSCR of 0.98. The WA DSCR of the CMBS is 1.7.
“About 80% of these multifamily loans are set to mature in the next 18 months, or by the end of 2024, and the WA DSCR (NCF) of all CRE CLOs in this dataset is below 1.0x,” she writes. “It is important to note that the $3.7 billion in CRE CLO loans do not have hard maturity dates as all these loans have the ability to extend, with a weighted average of 27 months remaining in extension options.” But it’s not clear whether the loans would meet typical minimum performance thresholds, like for DSCR.
The Trepp figures show that a “sizeable proportion” of the loans have reserves to protect cash flow, but in many cases the amounts are “modest”, and it isn’t clear whether they are sufficient to enable a rework.