In the Wall Street Journal, Konrad Putzier and Will Parker cover why the next few years for multifamily real estate are likely to be challenging following a strong bull market over the past decade. However, the trends that underpinned this bull market are slowing or reverting in some cases.

These include rising rents, a wide gap between supply and demand, and high rates which is complicating efforts to refinance. Of course these challenges are compounded by the fact that many owners and operators of apartment buildings took on too much debt with the belief that rising rents and property values would overcome any issues of leverage.

However, they didn’t account for the highest rates in decades especially as rates don’t seem likely to come down anytime soon given continued resilience for the economy and labor market. YTD, apartment building values are down 14%, undoing much of last year’s 25% gain. 

Already, some apartment owners have defaulted, and many fear that more defaults are imminent. While high rates are the precipitating factor, the woes have also highlighted that many owners had too much leverage. Many borrowed up to 80% of the property’s value using short-term, floating-rate debt. Additionally, credit markets might be tougher to access given the ongoing struggles of regional banks. 

Finsum: Typically, apartment buildings are seen as one of the safest parts of the real estate market. This is not currently true given that many owners have too much leverage and are seeing rents moderate while costs continue to climb.