Despite the supercharged rents and record-low vacancy rates of last year’s multifamily market, some developers couldn’t escape the squeeze of rising rates.
The Chetrit Group is facing default on a $481 million loan covering 43 properties that the developer is now looking to sell, according to a year-end report by Trepp.
The mortgage entered special servicing last year for maturity default, signaling that Chetrit had failed to pay its lender the principal balance when the loan came due.
Weak revenue streams and higher financing costs are to blame.
The loan, financed by JP Morgan Chase, covered an 8,671-unit portfolio Chetrit had picked up in mid 2019. Its properties spanned New York, the Sun Belt, Illinois, Indiana and Ohio.
But despite two years of strong rental demand, Chetrit’s portfolio had a mere 76 percent occupancy from March 2021 to March 2022, Trepp found. By comparison, U.S. apartment occupancy hit an all-time high in December 2021, topping 97 percent, Bloomberg reported.
As a result, Chetrit’s holdings weren’t “generating the cash flow needed to fully service the loan,” Trepp’s report reads.
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Last year’s rate hikes compounded the problem. Chetrit’s floating-rate loan has an interest rate pegged to Libor, plus 5 percent.
Libor rates, like mortgage rates, aren’t directly tied to the federal funds rate controlled by the Federal Reserve, but typically move in the same direction. So the Fed’s cumulative 4.25 percentage-point bump last year would have sent Chetrit’s interest rate soaring.
It’s possible the developer went from paying 5 percent interest in early 2022, when the six-month Libor rate stood at one-third of 1 percent, to over 10 percent interest by year’s end, according to Bankrate’s Libor rate index.
Chetrit Group did not respond to a request for comment.
Though the multifamily market has shown little sign of distress, industry experts, such as real estate investment platform Carroll Credit, expect investors that spent too much on properties at low cap rates could get caught by cap rate expansion.
The Atlanta-based firm told GlobeSt. it expects to see distress in the Sun Belt. Record rent growth and occupancy levels had already begun to slip last summer.
Trepp projected that multifamily demand would remain healthy as still-high home prices coupled with low unemployment kept more tenants renting.
The firm cautioned, though, that if rising rates loosen up the labor market, layoffs could reduce the revenue streams of multifamily landlords.
“There are likely going to be some distress hot spots that emerge in 2023,” wrote Stephen Buschbom, Trepp’s research director.