Multifamily Mark to Market

In response to the economic impact of the pandemic, central banks around the world implemented historically low-interest rates as part of their monetary policy measures. The logic was to stimulate economic activity and encourage borrowing and investment during times of economic uncertainty. With central bank rate cuts, interest rates reached all-time lows, which led to increased demand for commercial development and refinancing opportunities. Investors borrowed record amounts when Secured Overnight Financing Rate (SOFR) was .25 percent, now up to 5.25 percent.

The pandemic’s blow to office space is all over the headlines. Office spaces constitute 80 percent of the new commercial real estate loan delinquencies, with an occupancy rate of approximately 50 percent. However, they form only a modest 15 percent share of the $20 trillion market. Multifamily is a different beast by several billion dollars.

$8 billion in multifamily commercial mortgage-backed securities (CMBS), known as the “Red October,” are set to mature in the latter half of 2023. Essentially, this surge is equivalent to the total expected maturation of office CMBS throughout all of 2023. The combination of stricter lending criteria and higher-cost debt options leaves borrowers with limited choices.

As a result of higher interest rates, the cost of borrowing for multifamily property owners increased dramatically. With a wave of approaching maturities, the sector can expect the following:

  1. Reduced property valuations. Higher interest rates can lead to lower property valuations since potential buyers may be less willing to pay a premium for properties with higher financing costs.
  2. Refinancing challenges. Some borrowers may find refinancing at higher rates challenging, leading to potential defaults or distress in the multifamily sector.
  3. Investment performance. Higher interest rates can instigate a decrease in the value of multifamily mortgage-backed securities, impacting overall investment performance.
  4. Market demand. Higher interest rates may drain the demand for multifamily properties, further affecting property sales and development.

Take, for example, the A&E Real Estate $500MM Portfolio. Around June 2021, during a period of historically low-interest rates, the major player in the multifamily housing sector decided to restructure a collection of 31 properties spread across the Bronx, Brooklyn, Queens and Upper Manhattan. They secured a fresh loan of $506 million from JPMorgan Chase, a three-year arrangement carrying a 2.4 percent variable interest rate. The primary objective was to complete ongoing projects, raise rental prices and enjoy the resulting profits.

However, the Federal Reserve had a different trajectory in mind. The portfolio’s debt service coverage ratio experienced a sharp decline to 0.88 due to the increasing interest rates. With the loan maturing next June, A&E will potentially face another interest rate hike unless it manages to secure an extension. There’s even a chance that refinancing might not be feasible at all. Across the years 2021 and 2022, property owners specializing in multifamily housing borrowed a total of $682 billion through short-term, low-interest loans.

Due to risk management operations, banks are temporarily taking a step back. Private lenders, including mortgage REITs, debt funds and private equity groups, are poised to capitalize on this market. BayBridge Real Estate Capital has extensive relationships with major players that will shape the commercial landscape in the next decade. For a comprehensive capital markets consultation, contact the experts at BayBridge.

  • Cavannaugh, Suzannah (2023, July 3) “A Maturity wall is Coming for Multifamily. Can Rescue Capital Save the Day?” Retrieved August 11, 2023 from
  • Richter, J. (2023, August). Real Estate Daily Beat. Daily Beat NY. Retrieved August 11, 2023, from
  • Snyder, Xander. (2023, August 2) “First American Economic Outlook” America’s Commercial Real Estate Podcast. Retrieved August 11, 2023 from

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