I just read an interesting article published by the NY Times. It was quoting a concern that as many as 20% of loans on apartment complexes may be at risk of default. They cite several reasons including much higher interest rates and adjustable rate mortgages on about 1/3 of multifamily housing, flat or declining rent, overbuilding in some key cities (Miami, Atlanta, Phoenix and Austin mentioned).

While not as bad as office buildings (7% in default) or hotels (6% in default), only 1.7% of multifamily properties are currently more than 30 days in default on loans. That number could rise as high as 20% if the current trends continues. If you will remember, I posted recently about the annual Harvard review that cited similar concerns with profits declining from 8% down to 2% over the last two years on multifamily properties.

It's part of a cycle, repeated many times.

A lot of folks bought or built apartments in 2019-2020 using 5-year commercial ARMs that are getting ready to start adjusting. Commercial rates were around 4.5% back then. Today, they are around 8%. Others have balloons, so they'll have to attempt to refi into immediate higher rate loans, without any actual adjustments.

MikeA[TX], Richard[MI], Thanks for sharing the info. I didn't know that the real estate market was bad in the 90's. Definitely looking forward for the cycle to return. It's been years that I couldn't find any multiunit deals that make sense. The prices have gone too high while rent is lagging. CAP rate keeps getting lower but people still bid the price up. Is HUD still a good place to buy foreclosed multiunit properties? I've only bought them through MLS. The only property I bought from HUD was a condo.

The apartments locally seem to have a lot more vacancies than they used to. I don't know if that translates into "they are in trouble".

On just about every vacant land, huge apartment complexes have been going up, and are still being constructed. I drive by them wondering where they are going to get all the tenants to fill those buildings. I assume someone has done a feasibility study before they started?

It doesn't matter how cheap they sell for, I would never be able to come up with the money to buy a building with 30-40 units, or even more.

There are very few older buildings. The folks of Idaho are not apartment dwellers, so there were no apartments built until recently. The new apartment buildings are all fancy and I suspect that they are intended for incomers who are accustomed to living crowded, wherever it is they are coming from.

I recommend breaking out that real estate tool box and dusting off Sub To transactions.

Now in a perfect world, these transactions would allow you to lock in the initial low rate (which will not be the case) , there will be five years of pay down and the down payment. So there are opportunities out there in EVERY market

So what do you need to be on the look out now? Unproven syndication "opportunities"

Sisco,

Excellent question -

The larger players control the market place. Start out by just checking out what they are offering. Look for those move in specials, you are correct to believe they are coming.

Accepting poorer quality tenants is a nasty sand trap that swallows up the untrained or the overly inspired.

There will be opportunities for those who have prepared themselves. If a property with equality goes into default, placing that property into a land trust and then purchasing that land trust will allow those who have prepared to bail these folks out. Land trust are for privacy - but the elephant in the room is the ability to take the property over subject to existing financing.

There are a couple of syndicators I follow who've been saying the same thing. One of them says the fire sale is going to occur in C class assets. There was a bunch of money chasing real estate, so many of these guys were forced to put that money to work somehow in a situation were there was more money than available assets, hence the overpaying and over building. Most of us don't play at this level but the question is how much of a spillover affect this will have in our playground.

There's certainly going to be some opportunity but it's still early yet. I think the folks who bought pre-covid and who aren't excessively leveraged will do fine even with interest rate resets. I don't think the same can be said for those who bought at the peak. A combination of rent concessions, higher vacancies, lower tenant standards and higher rates will be their challenges. All of these combined mean lower valuations and trouble for banks and investors.

I picked 13 properties in in the hood at RTC auctions 1993-1995 .... sold the last one in 2022.

I heard about the coming Tsunami of luxury apartment defaults back several years ago at a Retreat I think it was. I think that one already happened LOL! This one is another one.

Speaker said the developers over-built, needed to get them rented to sell or refi so you when you start seeing "First Month Free!" or "No Credit Check!" or whatever, you know it's coming.

Tyran, yes commercial offices are leading this trend. Currently 7% of commercial office buildings are in default on their loans. The only reason they haven't been called by the banks is the bank will have to write off a huge portion on these buildings if they take them back. The banks are doing their best to keep these guys alive hoping that it will turn around in the next year or two.