“Multifamily is in the crosshairs”: Execs talk distress, opportunities at Milken conference

Real estate executives are admitting that multifamily borrowers are starting to see trouble — and that presents opportunity for some. 

“Multifamily now is in the crosshairs,” Barry Sternlicht, who runs Starwood Capital Group, said at the Milken Institute’s annual conference at the Beverly Hills Hilton in Los Angeles on Tuesday, where many real estate executives shared their opinions on investment opportunities. 

Sternlicht is projecting a “huge distress cycle,” thanks to pressures facing regional banks, he said on a panel discussing global real estate. 

“This is really a balance sheet crisis,” he said. “The Fed is very aware that it has a teetering regional banking system that loads about $700 billion, that are real estate loans [originated] in a low interest rate environment, and the small borrowers are going to have a hard time refinancing.” 

“We’ve gotten calls: ‘How can you help, can you take over banks’ assets?’ They’re trying to arrange recaps before they fail,” Sternlicht added.

After the collapse of First Republic Bank, Signature Bank and Silicon Valley Bank last year, many regional banks have pulled back from lending on real estate, particularly on multifamily properties. The absence of those lenders presents opportunities for other players in the market.

On a separate panel to Sternlicht, Tim Sloan, an executive at Fortress Investment Group, a private lender, said the firm was particularly keen on New York’s multifamily market, given First Republic, Signature and New York Community Bank “don’t exist anymore for new lending.” Previously, he said, those banks made up 30 to 40 percent of the market. 

Multifamily has become a pain point for NYCB — in the first quarter, the bank reported $800 million in defaulted loans, up 400 percent from the same period last year. Much of the pain stems from rent-stabilized apartment complexes in New York. 

“Who’s going to provide that? We’re happy to provide it,” he said of the gap. “We’re doing it right now at 50 to 60 percent loan-to-value,” adding Fortress was getting low-teens returns for “taking recapitalized multifamily risk in one of one of the world’s great cities.” 

Jase Auby, the chief investment officer at the Teacher Retirement System of Texas, expressed concerns on the same panel as Sloan. 

“We’re bullish on housing in general, but there is going to be a lot of distress in multifamily,” Auby said. “There are a lot of developers that are going to need to refinance.”

Capitalizing on data

Many panelists, including Sternlicht, said the weakness of the office market was a “U.S. phenomenon,” but are seeing a much more resilient office market in Europe. 

“Last year for the first time ever more than 50 percent of our investment activity was in Europe,” said Kathleen McCarthy, a global co-head of real estate at investment giant Blackstone. 

Across panels, there was one asset class that generated a lot of excitement: data centers. Most of that is driven by recent advances and investment in artificial intelligence.

“Data centers are the physical assets that are benefiting from this explosion in information and in digitization,” McCarthy said, adding that the data center industry is still in its early stages. 

Blackstone bought data center operator QTS in 2021, and its valuation more than doubled since then to $25 billion as of the end of 2023, Bloomberg reported. The CEO of chip maker Nvidia, Jensen Huang, has predicted the world will have $2 trillion worth of data centers in the next five years. 

Physical real estate is “so important” to the tech companies deploying AI, so real estate companies need to “meet them where they’re at,” she said. 

That comes with challenges, including meeting energy requirements of the tenants, and the large amount of capital required to build these facilities.  

For Sternlicht, the main question about data centers is around the exit strategy. 

“This is an overgrown industrial building, they’re billion-dollar assets — how will we exit these things?” he asked. “I think that will be interesting, because it is an enormous use of capital.”

“It is definitely the bright spot in the real estate world, I don’t think I’ve ever seen anything like it — seven tenants driving everything,” he said.