The turbulence in commercial real estate is now affecting rental apartments, beyond urban offices and older shopping centers. The multifamily sector has been viewed as a relatively safe investment, particularly due to increased home prices during the pandemic that pushed many potential buyers to continue renting.
Landlords have enjoyed rising apartment rents and affordable debt, driving property values to record levels. However, the recent uptick in interest rates has dampened the apartment sector’s appeal. Property values have declined by more than 20%, according to Green Street, a real estate analytics firm, and rent growth is decelerating. As a result, some buildings with significant floating-rate mortgages no longer generate sufficient profits to cover debt payments.
Applesway’s experience serves as a warning for commercial property investors who sought substantial returns by purchasing modestly-priced buildings and increasing rents following renovations.
As interest rates rise and hedging contracts expire, foreclosures like Applesway’s could become increasingly common. Trepp data shows that a record $151.8 billion in US mortgages backed by rental apartment buildings will mature this year, with $940.1 billion set to expire over the next five years.