Good Asset, Bad Debt: The Multifamily Opportunity Hiding in Maturing Loans

A wave of multifamily debt is coming due and a lot of owners can't refinance their way out.
It started between 2021 and 2022, when lenders wrote a mountain of short-term, floating-rate debt on multifamily at rates near 3%. Those loans are coming due. When an owner who borrowed at 3% has to refinance at 6.5%, the property can't cover the new payment and the bank won't make up the difference.

A Wave of Maturing Debt Is Reshaping the Market

For two years, lenders papered over the problem. They extended loans and hoped rates would fall, an approach the industry calls “extend and pretend.” That patience is running out and lenders are starting to force owners to pay down the loan, sell or hand back the keys.

The result is a growing supply of quality assets changing hands at some of the most attractive pricing we've seen in over a decade, often straight from the banks. For investors with capital and the ability to operate, it's a rare opening. The owners who overpaid with the wrong debt are the ones covering the cost. The distress in multifamily right now is a debt problem and that should change how investors look at deals.

The Difference Between a Bad Asset and Bad Debt

There are two kinds of distress. The first is a bad asset, a property in a declining market, with structural problems or demand that's never coming back. No amount of capital fixes that and investors are smart to walk away.

The second is a good asset with bad debt, a well-located property with demand that's only in trouble because the previous owner used the wrong capital structure or didn’t run it well. The building is fine, the problem is the loan.

That’s where today’s opportunity lives and it carries less risk than the word “distressed” suggests, because investors are acquiring a building with a solid foundation that just needs the right capital and management behind it.

What This Looks Like on the Ground

Earlier this year, we acquired a 997-unit apartment community in metro Atlanta. On paper, it looked distressed. Underneath, it was a strong asset with bad debt in a high-demand location, which the prior ownership had under-capitalized and under-managed.

Because the seller was working through the lender, we acquired it at a discount to its appraised value, closer to the cost of the debt than the value of the real estate. All it needed was capital and better management.

The Discipline That Separates Buyers From Casualties

Owners in trouble are the ones who underwrote optimism, tomorrow's rents and cheap short-term debt they'd have to refinance later. When rates climbed, the model they'd built couldn't survive it.

Instead, we underwrite the rents a property earns today, before any of the upside we plan to add. We finance with conservative, longer-term agency debt rather than another bridge loan. And we budget for the capital a neglected property will need, since a distressed owner usually stops investing in the building before they sell it.

A deal has to work on today's numbers and today's cost of capital.

Where This Goes From Here

As these maturing loans work through the system over the next couple of years, the supply of forced sellers will thin and pricing will normalize. Investors moving with discipline now will look back on this stretch as one of the best buying environments of their careers.

My advice, whether you invest directly or back operators who do, is to think about distressed assets as potential opportunities. Ask what the real problem is. If it's the market or the building, keep moving. If it's the debt, you might be looking at the kind of opportunity this cycle was built to create.

The best real estate opportunities rarely look obvious. Right now, plenty of them are hiding inside other people's mistakes.