Rescue Capital: The Superhero For Multifamily Properties In Distress

When interest rates hit historic lows during the coronavirus pandemic, many multifamily investors acquired deals using floating-rate bridge loans. Interest rates have since soared — often doubling — and those investors not having trouble making payments and are defaulting on the loans.  

While new permanent financing could help, lenders don't often offer enough to fully pay off the existing loan on a property.

Nearly $2.7 trillion in commercial real estate debt will mature by 2027, with about $1 trillion of it associated with multifamily properties, according to the Mortgage Association.

A lot of the debt was put on floating-rate, shorter-term loans, said multifamily investor Mandy McAllister, co-founder of GoBundance Women, a membership community of executives, entrepreneurs and investors largely involved in commercial real estate.

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Investors typically hold multifamily properties for three to five years, which is about the same term as a bridge loan. Investors raced to invest in multifamily properties about three years ago when interest rates were historically low, cap rates were compressing and values were rising.

When a loan matures, the borrower can either refinance it or pay it off. Either option requires cash, which investors may be short of.

But the way out could be private equity investors, who are lining up "rescue capital" for the properties to bail borrowers out.

New York-based private equity fund manager ACRE, for example, raised $400 million for its Fund IV, which will provide preferred equity loans to multifamily properties that need to fill gaps in their financing.

"I suspect more of these concepts will pop up," McAllister said. "It's a chance for them to take advantage of that delta."

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Not all geographic markets are in trouble, though, McAllister said. In states that have seen job growth like Texas, Florida and Indiana, the multifamily market is still strong.

"Where the jobs go is where the long-term growth of multifamily goes," McAllister said. "I'm worried for states that have had a decrease in population since COVID."

The multifamily market is likely to bounce back, but it won't return to the "normal" it experienced for the last five years.

"If what we're saying is normal is the past five years — what I will think of as the golden years of multifamily investing — I don't think that is a normal we'll return to," McAllister said.  "The astronomical returns may not be a normal thing moving forward."

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