Multifamily developments in the Sun Belt are next in line for CRE pain after offices predicts Carson Block, chief executive officer of short-seller Muddy Waters Capital.
“A lot of multi-unit residential in the US — particularly in the Sun Belt — is in trouble,” Block told Bloomberg in an interview. “That’s the shoe that hasn’t really dropped yet, but that we think will.”
Since a year ago, Carson has been publicly arguing — and investing — that the multifamily market has some fundamental weaknesses. He announced then that he was shorting Blackstone Mortgage Trust, which lends money against commercial real estate collateral. And it hasn’t been all office towers as far as the eye could see, although those were earlier warning signs.
“There’s been a lot of extending and pretending when things have been backed by paper profits,” Block told Bloomberg at the time. “It’ll be the second half of next year that we’ll really start to see losses.”
A Blackstone Mortgage Trust spokesperson told Bloomberg that liquidity was at “record levels” and that Muddy Waters was making a statement to affect market perception and drive down share prices.
“We believe this self-interested and misleading report is designed solely for the purpose of negatively impacting BXMT’s share price for the short seller’s own benefit,” the spokesperson said at the time.
However, recent analysis suggests not all, but significant portions of multifamily could be facing trouble. A Gray Capital research brief from last week, focusing mostly on multifamily, said that “extend and pretend is coming to an end as lenders and equity are growing impatient with borrowers.” Instead of fixing problems, the approach has kicked the can down the road. Too many borrowers have yet to raise the extra capital they need or find other financing to pay off their existing loans. Lenders and equity holders are looking for an end to holding what is now a risky liability. There is also only so long a company can hold a debt without writing it down.
Many investors leaped into multifamily when work-from-home trends during the pandemic sent many looking for more space at home, especially in areas that had seen large demographic increases, particularly in the Sun Belt and West. Developers built heavily, expecting increased demand. Rising costs of construction, land, and existing properties meant investors and developers needed to heavily increase rents to make plans pencil.
However, as often happens in CRE, too many piled into the perceived opportunity. There were record numbers of new units brought to market in 2023 and 2024, depressing rent growth and driving up vacancies.
Multifamily maturities are bringing risk surprises like negative leverage, according to Trepp. When net operating income (NOI) cannot cover the debt payments, then there is a debt service coverage ratio (DSCR) of less than one. The property cannot pay its keep. Many equity investors have become ever more reliant on property value appreciation for returns. And floating debt is rampant, exacerbating the need for higher rental rates, which aren’t coming yet, to offset increased financing costs.