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
    From left: 121 West 26th Street, Watermark’s Brendan Medzigian and Two Kings Principal Christopher Wang (Google Maps, Watermark , LinkedIn)
    Watermark Capital sells Holiday Inn in Chelsea for $80 million
    Watermark Capital sells Holiday Inn in Chelsea for $80 million
    Jim Chanos, president and founder of Chanos & Company LP (Getty Images, iStock/Photo Illustration by Steven Dilakian for The Real Deal)
    Jim Chanos’ next Big Short: data centers
    Jim Chanos’ next Big Short: data centers
    From left: Lawrence Friedland and Stanley Zabar in front of 2231 Broadway (Getty Images, Friedland Properties, iStock)
    Friedland sues Zabar family in UWS dispute
    Friedland sues Zabar family in UWS dispute
    Allure’s Joel Landau and 9036 7th Avenue in Brooklyn (Allure, Google Maps)
    Abe Leser’s ailing hospital deal revived for $160M
    Abe Leser’s ailing hospital deal revived for $160M
    Skylight Real Estate's Bennat Berger with 300 Grand Street (Skylight Real Estate, Street Easy, iStock)
    Scarcity play: Hoboken apartments fetch $56M
    Scarcity play: Hoboken apartments fetch $56M
    arrow_forward_ios

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

    Loading...