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Apartment Sector Faces Growing Distress in Commercial Real Estate Market

ByDayne Lee

Feb 5, 2024

Apartment Sector Faces Growing Distress in Commercial Real Estate Market

The commercial real estate market is experiencing increasing distress, now extending from office spaces to apartment complexes, with over $67 billion in housing facing potential distress as borrowers struggle with loan repayments. This development poses significant challenges for lenders like Arbor Realty Trust Inc., known for its commercial real estate collateralized loan obligations (CRE CLOs), which have surged in popularity during the pandemic. Arbor Realty Trust Inc. has seen a notable increase in payment defaults within its CRE CLOs, with preliminary data indicating a significant rise in delinquency rates.

Lenders Face Rising Delinquencies

Arbor Realty’s floating rate loans, a significant part of its financing strategy, have shown increased distress, with a more than double jump in failed scheduled payments in the last quarter. This distress signals broader concerns within the commercial real estate market, as rising interest rates and market pressures translate into lower property values and increased loan repayment challenges.

Market Trends and Policy Shifts Impacting Financing

The sharp tightening of monetary policy caught apartment building financiers off guard, particularly those extending bridge loans with floating interest rates. Lenders like Arbor face heightened risk of borrower default, particularly as they hold the equity portion of CLOs, the riskiest layer of securitization. This situation is exacerbated by the broader market’s reaction to rising interest rates affecting property valuations and investor losses, mirroring the impact of rising yields on bond prices.

Potential Distress and Market Outlook

The trend of lending to apartment complexes and bundling these loans into CLOs gained traction as interest rates fell in response to the pandemic. However, the landscape shifted with rising borrowing rates, new supply challenges, and escalating expenses contributing to the strain on the multifamily real estate sector. The multifamily delinquency rate is expected to see a significant increase, with over $20 billion in recently purchased apartment complexes now potentially distressed.

Investment Strategies Amid Emerging Problems

Despite the challenges, investment opportunities may arise in the multifamily sector, with firms like Blackstone Inc. considering investing in multifamily assets amid current market weaknesses. The outlook for borrowing costs shows signs of improvement, with expectations of Federal Reserve rate cuts potentially providing relief to landlords and the broader real estate market.

Arbor Realty Trust Inc. has faced scrutiny from short sellers, highlighting concerns over distressed loans within its portfolio. With significant collateralized loan obligations outstanding, the lender’s financial health and strategies will remain a focal point for investors and market analysts.

Featured image credit: R.M. Nunes via Shutterstock

Dayne Lee

With a foundation in financial day trading, I transitioned to my current role as an editor, where I prioritize accuracy and reader engagement in our content. I excel in collaborating with writers to ensure top-quality news coverage. This shift from finance to journalism has been both challenging and rewarding, driving my commitment to editorial excellence.