Apartment complexes will be the next major source of problems in the commercial real estate market after offices were hit hard in recent years, according to the short seller Carson Block.
Even before the pandemic, many properties were trading at negative capitalization rates, Block said. Cap rates measure how much net operating income a property generates compared to its value.
"A lot of multi-unit residential in the U.S. — particularly in the Sun Belt — is in trouble," the chief executive officer of Muddy Waters Capital LLC, said in an interview in London. "That's the shoe that hasn't really dropped yet, but that we think will."
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Investors piled into the multifamily market after interest rates were cut during the pandemic, betting that work from home would boost rents. Metropolitan areas across the so-called Sun Belt — home to cities like Nashville, Tennessee; Austin and Tampa — were among the biggest beneficiaries of the trend.
Now, though, almost $76 billion of apartment complex loans are at risk of distress, according to MSCI Real Assets. That's partly because many landlords took on floating-rate loans to modernize the properties and have been hit hard by a spike in borrowing costs in recent years.
"A lot more of these things were purchased with ultra cheap money," Block said, noting that now "financing costs are massively up."
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Wall Street is also on the hook, after many of the debts were
A wave of new multifamily construction in the Sun Belt during the pandemic is winding down but that might not be "enough to prevent another year of challenging pricing dynamics for landlords that are still competing with new developments," Jeffrey Langbaum, a senior analyst at Bloomberg Intelligence, wrote in a Nov. 19 note.
