CRED iQ estimates a $6.8 billion equity gap in maturing multifamily debt

CRED iQ puts the equity gap behind maturing multifamily debt at $6.8 billion. The firm resized every apartment loan in Fannie Mae, Freddie Mac and commercial mortgage-backed securities deals maturing between October 2026 and December 2028 — $136 billion of balance — at current new-issue coupons plus September's rate increase, Commercial Observer reported. Of that pool, 23 percent of loans and 31 percent of the balance could not refinance without new equity, meaning the shortfall skews toward larger loans. The median gap is 15 percent of the loan, or roughly $25,000 per apartment. A current $246 million Freddie Mac loan on 20 Exchange Place, a 767-unit tower near Wall Street, would need about $63 million.

Each further 25 basis points adds roughly $1 billion to the gap; two more hikes would leave 39 percent of maturing multifamily debt short of a refinance. September's SOFR move from 3.62 percent to 3.85 percent pushed 178 more loans, $4 billion of balance, below a 1.25 times coverage test. Passed through to permanent loan coupons, the Sept. 17 increase added $846 million to the equity gap, per the analysis.

Loans originated in 2021 and 2022 carry a median 3.35 percent coupon and now face refinancing rates two to three percentage points higher. Some 46 percent of that vintage, and 57 percent of its balance, needs new equity, against 15 percent of loans written in 2016, 2017 and 2018. Income divides the pool the same way: loans that clear the coverage test have grown net operating income a median 31 percent since underwriting, while those that fall short have seen it drop a median 12 percent.

Among large markets the gaps run widest in the West and Sun Belt: 70 percent of maturing multifamily debt in San Francisco falls short, 55 percent in Atlanta and 51 percent in Denver, against 24 percent in Los Angeles and 13 percent in Chicago. Park West Village in New York, an 850-unit property with a loan split across seven conduit deals, was underwritten at 1.34 times coverage, so stress in one asset would be spread across several bond stacks.

The near-term remedy is new capital rather than a workout, and that points to who supplies it. As Commercial Observer reported in August, community banks have been running off multifamily loans while private lenders move in; the $6.8 billion figure gives that trade a size. It is not yet a delinquency story: Freddie Mac's multifamily delinquency rate hit a 20-year high of 0.64 percent in October, low in absolute terms. A coverage shortfall on a performing loan leaves three routes — the lender extends, the borrower posts preferred equity, or the asset sells — and the 2021-22 vintage is where the arithmetic is tightest.