More multifamily landlords are making less than their lenders

Rising interest rates trigger increase in negative leverage

National /
May.May 24, 2022 12:30 PM
Photo illustration depicting landlords being outearned by their lenders (iStock)

(iStock)

Sales of multifamily assets have been hot in the past year, but rising interest rates are now putting investors into a bind.

Negative leverage in the sector is as widespread as it was in the subprime crisis, the Wall Street Journal reported. The crisis resulted in soaring defaults on apartment-building debt.

Negative leverage occurs when the interest rate on a multifamily building’s or portfolio’s mortgage rises to the point where landlords make less money on the assets than the banks, despite carrying the higher risk.

Returns are already shrinking because the cost of buying multifamily buildings is soaring. In the first quarter, prices paid for apartment buildings were up 22.4 percent year-over-year, according to MSCI Real Assets. Investors spent a record $63 billion on apartments in the first quarter, according to CBRE.

Investors have reportedly been buying apartment buildings at a capitalization rate as low as 3.5 percent, NewPoint Real Estate Capital CEO David Brickman told the Journal. Some mortgage rates are as high as 4.5 percent, though, creating negative leverage.

Interest rates are on the rise, too. In March, the Federal Reserve raised interest rates for the first time since 2018, boosting the benchmark by a quarter of a percentage point. The Fed forecast six more interest rate hikes this year.

The negative leverage phenomenon has some drawing comparisons to the subprime fiasco of the 2000s.

“You’re seeing a lot of the same mistakes,” Nitin Chexal, CEO of Palladius Capital Management, told the Journal.

Despite the troubling trend, few expect a flood of defaults. Investors carry less debt than they did in 2008 and the stability of multifamily assets will likely remain appealing to institutional investors. Additionally, rent growth will bolster returns if it keeps trending upwards.

However, rising interest rates do figure to slow sales of multifamily properties, which totaled $3.2 billion last quarter in New York City.

“The first quarter marks a drastic change in the cost of debt and the expectation is that interest rates will continue to rise,” Ariel Property Advisors president Shimon Shkury toldThe Real Deal. “As a result, we expect momentum to continue in the second quarter as both buyers and sellers rush to complete transactions, but we also expect the second half of the year to be somewhat slower.”

[WSJ] — Holden Walter-Warner





    Related Articles

    arrow_forward_ios
    Clockwise from top left: 162 West 13th Street, 325 Avenue Y in Brooklyn, 1281 Viele Avenue in the Bronx (Credit: Google Maps)
    Here’s what the $10M-$30M NYC investment sales market looked like last week
    Here’s what the $10M-$30M NYC investment sales market looked like last week
    Real Capital Analytics data showed that New York’s multifamily market had a very slow July. (Credit: iStock)
    New NYC rent law “beginning to shut down investment”
    New NYC rent law “beginning to shut down investment”
    Numbers were down across the board (Credit: iStock)
    New York’s multifamily market had its slowest first half of the year since 2011
    New York’s multifamily market had its slowest first half of the year since 2011
    Kohl's CEO Michell Glass (Kohl's, iStock)
    Kohl’s looking to cash in on $8B real estate portfolio
    Kohl’s looking to cash in on $8B real estate portfolio
    Sackman Enterprises president Carter Sackman and 15-19 West 96th Street (Sackman Enterprises, Google Maps, iStock)
    Fed up Chabad sues Sackman over unfinished condo
    Fed up Chabad sues Sackman over unfinished condo
    A photo illustration of Times Square (iStock)
    Retail asking rents show signs of recovery
    Retail asking rents show signs of recovery
    SL Green's Harrison Sitomer and 450 Park Avenue (SL Green, Taconic Partners)
    SL Green closes on Park Avenue office tower
    SL Green closes on Park Avenue office tower
    240 Sullivan Street and Sky Management’s Jonathan Ohebshalom (Sky Management, Google Maps, iStock)
    Sky buys Greenwich Village mixed-use building in quiet week for i-sales
    Sky buys Greenwich Village mixed-use building in quiet week for i-sales
    arrow_forward_ios

    The Deal's newsletters give you the latest scoops, fresh headlines, marketing data, and things to know within the industry.

    Loading...