Lenders Race to Buy Back Delinquent Multifamily Mortgage Loans

As delinquencies mount in multifamily mortgages, lenders are racing to buy back loans from their commercial real estate collateralized loan obligations (CRE CLOs) to mitigate rising rates.

Stuck on repeat: Lenders have reported a notable rise in loan delinquencies within their CRE CLOs—securities backed by loans primarily secured by multifamily properties. To combat this, in Q1, lenders repurchased up to $520M of delinquent loans, up 210% YoY, an increase from $167.7M during the same period last year. Lenders are utilizing warehouse lines of credit to finance these buybacks, capitalizing on temporarily low financing costs, which could rise if the Federal Reserve adjusts its interest rate policies.

State of the market: The CRE CLO market expanded aggressively, peaking with $45 billion in issuances in 2021, a 137% increase from 2019. This growth was driven by real estate syndicators capitalizing on the pandemic-driven demand in suburban areas. However, the sector now faces headwinds from higher insurance costs and stringent monetary policies, which have led to a 33% increase in distressed multifamily assets, escalating to nearly $10 billion as of March.

The impact: The cracks in the $79B CRE CLO market led to $10B in distressed multifamily properties in March when the distress rate for loans within CRE CLOs breached 10%. This deterioration has attracted attention from short sellers, particularly impacting firms like Arbor Realty Trust, where short interest has reached record levels.

➥ THE TAKEAWAY

Why it matters: CRE CLOs attract investors because the issuers have more skin in the game compared to CMBS, but they are criticized for comprising more vulnerable, lower-quality loans that are sensitive to interest rate fluctuations. Lenders are buying back delinquent loans to protect their fee revenue and bolster investor confidence in an unstable real estate market. However, the current high interest rates, tightening risk premiums, and the looming threat of federal rate hikes present significant challenges to the financing landscape.

Cooling Rents Offer Relief Amid Economic Uncertainty

March continued the trend of declining apartment rents, now down for the eighth consecutive month. Yet, the declines were modest, and median rents still hover above pre-pandemic levels, showing a resilient rental market.

By the numbers: According to a new report from Realtor.com, nationally, median rents across all unit types decreased by -0.3% year-over-year. The median rent stood at $1,722, only $36 less than the August 2022 peak and $313 more than in March 2019. Specifically, studio rents dropped by 1.4% to $1,435, while one-bedroom units decreased slightly by -0.1% to $1,602, and two-bedroom units fell by -0.5% to $1,908.

• Midwest: Rents were stable overall, with standout growth in cities like Chicago (+4.3%), Kansas City, MO (+3.4%), and Indianapolis (+3.3%). However, Chicago’s median rent was still approximately $1,000 less than those in New York or Los Angeles.

• South: The region recorded -1.5% decrease in median rents due to an increase in housing supply, even amidst high demand and low unemployment.

• West: After 13 consecutive months of declines, the West saw a slight recovery with a 0.4% increase in rents year-over-year. San Diego and Los Angeles saw rents rise by +2.9% and +1.6%, respectively, while Phoenix and Denver experienced declines of -3.2% and -1.9%.

• Northeast: Strong labor markets drove a +3.8% increase in median rents in New York and a +3.3% increase in Boston, reflecting a tight mismatch between supply and demand.

➥ THE TAKEAWAY

It’s not as bad as it looks: Although rental prices are slightly declining, the rental market continues to exhibit strength, particularly in major metropolitan areas. High interest rates are prompting potential homebuyers to delay their purchases and continue renting, potentially propping up rental costs. The report emphasizes the need for more housing construction, particularly in the Northeast and West, to ease the home supply shortage.

According to John Burns, horizontal apartment occupancy is declining much faster than other BTR categories because:

• Horizontal apartments are cheaper but also compete more with traditional apartments.

• Despite the higher cost, detached homes and townhomes are popular as BTR assets due to high occupancy rates.

• BTR typically targets different demographics from traditional apartments, explaining its higher occupancy rates.

• Phoenix faces intense competition in horizontal apartments, leading to rent fluctuations.

Will BTR development strategies change? Hard to say—downsizing may not be the best move, as renters prefer larger, pricier options.

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