Exposing Risk In Your Multifamily Debt Portfolio As the ‘Wall of Maturities’ Looms

The wave of multifamily development and acquisition that took advantage of favorable interest rates over the years is not without consequence. 

With apartment building sales peaking in the third quarter of 2021 at $115 billion, according to a report by Gray Capital, the so-called “wall of maturities” is upon us. In October 2023, about $4 billion in multifamily commercial mortgage-backed securities are coming mature and will need refinancing at a higher rate, with approximately another $4 billion due in November.

For lenders with multifamily debt portfolios, it’s crucial to protect exposure before it’s too late. The best way to do so is by using technology that gives you the opportunity to proactively mitigate your risk. 

Multifamily property debts are maturing. What should lenders know?

As owner-operators of multifamily buildings are set to refinance their loans, their interest rates are poised to spike. From October 2021 to mid-2023, the Federal Reserve funds rate jumped 500 basis points, or 5%.

Meanwhile, rental income growth is cooling off its high—from January to July 2023, rent prices jumped 2.9%, which is well below the 3.9% average cumulative growth rate four years prior (pre-pandemic).

Together, high interest rates coupled with a decline in rental income, the owner/borrower’s ability to service their debt obligations decreases. This poses a risk to lenders as they help people refinance their multifamily property loans.

“The maturation of multifamily CRE loans, coupled with soaring interest rates and the challenge of balancing new debt payments against declining rental income, presents a looming predicament for the CRE economy” says John Ricciardi Sr. Subject Matter Expert at Built.

Naturally, it’s up to lenders to understand the unique risks their multifamily debt portfolio faces as the wall of maturities looms. For example, you’ll want to consider questions like:

• Do I have any loans in my portfolio that are maturing in the near term?
• Are my tenant rent rolls up to date?
• Do I have any covenants in violation?
• How has my asset performance changed from its baseline?
• How do I expect my portfolio to shift in the near future?

What you can do: Proactive risk mitigation through technology

“It’s important to be proactive and use technology to keep a pulse on your portfolio” Ricciardi warns about debt maturation and the portfolio risk that accompanies it.

That doesn’t mean manual legacy technology. It means automated, cloud-based technology with atomic information reporting capabilities at a moment’s notice. 

Manual data tracking and reporting is unsustainable in a fast-moving maturation and refinancing environment where it’s imperative to identify risks before they hit.

With Built’s deal management suite, it’s different. “We can help you integrate all of your underwriting and asset management models into our platform so you can run IRR sensitivities, pull rent rolls across your portfolio, and automate asset and portfolio level reporting, basically at the click of a button,” Ricciardi explains.

Run sensitivities, make informed decisions with Built

Built’s deal management software allows lenders to tag an Excel file and upload it directly to the Built platform. This valuable tool eliminates the need for manual reporting, instead compiling all the information you need (like total debt to equity, rent roll, or IRR analysis, for example) in a format you can easily convert to.

Take quarterly asset summary reports, for instance. You or a member of your team may already be required to report on the performance of a certain part of your portfolio or even an individual asset. But what about when big events, like this wall of multifamily maturities, happens? 

You might need to distill your exposure to multifamily assets in the coming six months on the fly. Built auto-populates individual asset-level performance, so you don’t have to manually input numbers into a report. This also makes sharing the report to stakeholders extraordinarily easy—not to mention Built gives you a place in the cloud to store all that information.

The right data can help you uncover debt portfolio risks before they become a problem. Capitalization, loan-to-value ratios, rent rolls (including vacant space), capital expenditures, and IRR analyses—just to name a handful—are all key to exposing risk as the all-too-crucial to exposing risk in your portfolio. 

Risks in multifamily debt don’t have to take you by surprise.

The upcoming maturities in the multifamily sector are not alone. According to the Mortgage Bankers Association, an estimated $4.47 trillion worth of commercial real estate loans are on lenders’ books right now. Of that total, about 60% are due to mature by 2027. That equals more than $2.6 trillion in loan maturities in the next four years across the CRE space.

You can expand what you know about proactive risk mitigation through technology for multifamily debt portfolios into other spaces across the CRE universe. That way, risk—whether in multifamily properties or elsewhere—doesn’t hit you like a wave you didn’t see coming.