About 8% of maturing multifamily loans tracked by Yardi Matrix are at risk of defaulting, according to a new report from the real estate data and market intelligence platform.

Of the $1.4 trillion in multifamily debt tracked by Yardi, about $250 billion is scheduled to mature by 2028. While most market-rate loans have strong credit metrics, a significant portion is veering into dangerous territory, such as debt-service coverage ratios (DSCRs) of less than 0.6 or high loan-to-value ratios (LTVs) that are above 85%. Those characteristics increase the risk of default, especially if interest rates remain high.

“A DSCR of 1.0 means the net income and mortgage payments are equal,” Yardi Matrix writes. “When DSCRs fall below 1.0, net income is less than the mortgage payments. Properties that borrowed when rates were lower may not generate enough income to refinance the full balance of their existing loans at today’s higher rates.”

Advertisement

To avoid default, borrowers may have to add fresh equity to the refinance agreement, negotiate an extension or find a supplemental source of financing.

The analysis found that of the maturing loans with a low DSCR, $8.3 billion — which accounts for 315 properties with 72,835 apartments — is at a fixed rate. That means they are more insulated from additional interest rate increases, but the weak property cash flow may make refinancing difficult. Another $1.9 billion (49 properties with 11,487 apartments) is at a variable rate and is vulnerable to interest rate increases.

Of the loans maturing through 2030, $74.1 billion (2,367 properties, with 528,427 units) are connected to properties with DSCRs at or below 0.8, including $17.2 billion in properties coming due by the end of 2027.

The potential distress is concentrated in floating-rate loans originated from 2020 to 2022, when the Federal Reserve slashed the federal funds rate during the onset of the COVID-19 pandemic. Thirty-year interest rates hit a low of 2.65% in 2021, before rising later that year to about 3.15%.

Of the $52.5 billion of outstanding variable-rate loans originated from 2020 through 2022, about $13.5 billion are tied to properties with current estimated DSCRs of 0.8 or less. About $41.5 billion of construction loans are maturing by the end of 2028, and $4.3 billion of those have DSCRs at or below 0.8.

Yardi Matrix points out that low coverage may reflect slow lease-up due to competition for tenants in high-supply markets.

“Projects could face pressure if they do not generate sufficient income or reach stabilization before the loans come due,” the report states.