Failed deals. Capital calls. Lost investor money. A dreadful and sobering conversation ensues for many some commercial real estate sectors.
Residential (1-4 unit) and commercial (5+ unit) real estate fortunes are decoupling.
Multifamily commercial loans are at the mercy of interest rate resets.
Residential is stable due to low supply and sustained demand.
Neal Bawa from MultifamilyU and I outline the multifamily problem. Values have plummeted 25%.
The magnitude of the multifamily problem is about 1/80th of the 2008 Global Financial Crisis.
There are two reasons for the office apocalypse—both declining income and increasing expenses.
Only 3% of office buildings in downtown cores have a floor plan that can be converted to residential. Dreadful.
There will be possible discounts in the hotel industry due to a lack of funding and loans.
Retail has surprising bright spots.
We discuss the future of rents through 2026.
Will multifamily problems create contagion into 1-4 unit residential? We discuss.
Timestamps:
Multifamily industry changes and challenges [00:00:46]
Discussion on the new difficulties faced in multifamily, such as failed deals, capital calls, and banking industry challenges.
Opportunity arising in the multifamily market [00:01:12]
Exploration of the current opportunity in the multifamily market due to a 25% reduction in prices from the peak, caused by distressed transactions and high interest costs.
Anatomy of the problem with floating rate debt [00:05:57]
Explanation of the issues faced by apartment building owners or syndicators when they have floating rate debt without rate caps, leading to potential deal blow-ups.
The rate cap issue [00:08:29]
Discussion on operators neglecting to buy a rate cap or buying a rate cap set too high, leading to negative cash flow.
Magnitude of the multifamily reset problem [00:09:47]
Comparison of the current multifamily reset problem to the global financial crisis, highlighting the challenges faced by operators.
Challenges in refinancing properties [00:12:10]
Explanation of the challenges faced by properties in refinancing due to decreased net operating income and increased mortgage costs, leading to potential loss of investor money.
The availability of multifamily loans [00:16:50]
Neil discusses the availability of commercial real estate loans, particularly in the multifamily space, and how it differs from other asset classes.
Lending challenges in the commercial real estate space [00:18:03]
Neil talks about the severe lending challenges faced by asset classes like office, retail, and self-storage, while expressing confidence in the stability of multifamily lending.
Contagion and the impact on the 1 to 4 unit space [00:20:56]
Neil discusses the limited level of contagion that could affect the 1 to 4 unit space due to problems in the multifamily market, highlighting the healthiness of the single-family market and institutional interest in it.
The Troubled Office Sector [00:25:35]
The speaker discusses how the office sector is facing a long-term demand crisis due to the decrease in office occupancy and the challenges of converting office buildings into residential units.
The Ten-Year Problem in the Office Sector [00:27:06]
The speaker explains that the office sector is about to face a ten-year problem, with defaults and declining values affecting the downtown core and other assets.
Bright Spots in Retail and Hotels [00:29:21]
The speaker highlights that retail occupancy is higher than multifamily occupancy, and despite the Amazon effect, retail is doing well. They also mention that hotels have seen strong recovery post-pandemic.
Hotels and Multifamily Discounts [00:32:55]
Discussion on the current cash flow opportunities in hotels and multifamily properties, potential discounts in the next 12 months.
Retail Reinvention and Rents in a Recession [00:33:57]
