Multifamily loans will face a critical test in 2024 and beyond

Multifamily loans will face a critical test in 2024 and beyond

The U.S. apartment market absorbed 90,827 units in the third quarter, according to RealPage Inc. While that’s an improvement from the negative absorption seen throughout 2022, the approximately 1 million apartments under construction nationally as of the third quarter is still outpacing demand and tempering rent growth in many markets.

As of the third quarter, rents nationally were up about 2% year-to-date, RealPage found, though the data-analytics firm predicts the year-end 2023 figure could come in below that amount.

After the initial shutdowns and slowdown from the Covid-19 pandemic in early 2020, the multifamily market had a strong rebound in 2021 and into 2022. Low interest rates and high demand for apartments, not to mention what was frequently record rent growth, created a flurry of sales activity, with $335.3 billion in multifamily transactions completed nationally in 2021, according to CBRE Group Inc. By comparison, only about $29 billion in multifamily deals were completed in the third quarter of this year.

There is no evidence of widespread distress in multifamily yet, but the number of loans facing potential issues is rising. In October, the multifamily delinquency rate rose to 2.64%, up from 1.85% the month prior, according to Trepp.

By Trepp’s estimates, there’s been some $150 billion in commercial real estate collateralized loan obligation issuance, some 70% to 80% of which has gone to multifamily property types.

All eyes are on what the Federal Reserve will do with interest rates in 2024. It’s predicted by some economists and market watchers the Fed will move to lower interest rates next year, potentially at its May meeting. A recent Bankrate survey found 94% of economists believe the Fed could begin cutting interest rates next year.

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