It’s Time for History to Repeat Itself

We are living in an unsettled time, yet it is not unfamiliar.  History is repeating itself.

Interest rates have risen significantly above the plateau that dominated the real estate finance world since the Great Recession.  Tens of billions of commercial and multifamily loans are maturing and may not be able to be refinanced at current rates.  Commercial and multifamily loan production has fallen substantially, and traditional sources of capital have retreated to the sidelines.  Financial pundits eagerly await the stabilization of interest rates. They expect that markets will adjust to a high-rate environment, but it will take time.

Many in the commercial real estate lending industry believe that the effect of historically high vacancy rates in retail and office properties will eventually drive appraisal reductions that lead to investor losses in the lower-rated tranches of CMBS investments.

Housing policy-makers voice concerns about threats to maintaining affordable housing and government and the GSEs policies and programs are not resulting in a sufficient number of new units to make a dent in the national housing deficit.    

Financial commentators are uniformly noting that today’s fragile and declining market conditions are caused by liquidity issues, not credit quality as was the case in the Great Recession.  Nonetheless, the fact that so many potent trends are moving in a negative direction suggests that we could be at the brink of another serious dislocation in the real estate market and the investment markets that are based on it.

Richard Hill, a senior vice-president and head of real estate strategy and research at New York-based Cohen & Steers outlined the potential problems facing real estate investors and suggested that securitization of sub-performing and non-performing loans could be used as a mechanism to stabilize and recapitalize segments of the market.[1]  He believes that securitization may be the stabilizing mechanism for smaller banks who hold concentrations of CRE loans in same way that the Resolution Trust Corporation stabilized the commercial real estate industry during the Savings & Loan crisis.  He points to how the Federal Deposit Insurance Corporation used similar techniques to stabilize the commercial real estate industry after the Great Recession. 

Karen Stager, an industry expert, is quoted in an article by Samantha Rowan as “…(she) believes that in the current banking crisis the effectiveness of the CMBS market will rely on finding the right balance between private market initiatives and government support as well as considering the overall market environment and investor risk appetite.”[2]  Rowan again quotes Hill saying, “There is a consensus that in the coming months, there will be substantial distress. And this dislocation presents opportunity.

What’s the Problem?

Trepp, a leading voice in the real estate finance industry, estimates that $940 billion in multifamily loans are set to mature in the next five years, of which $176 billion is securitized.  This implies that 80 percent of $940 billion maturing in the next five years is unsecuritized debt. 

At present, securitization is difficult for multifamily loans whose underlying properties’ growth in net operating income has been insufficient to support debt service at today’s higher interest rates.[3]  Stager is quoted, “Given the potential magnitude and heightened scrutiny on lending standards, targeted government intervention may be crucial to facilitate the securitization of troubled loans in the near term.”[4]    Investment funds are now forming with the intention of infusing capital into bridge loan or gap funding arrangements that will take advantage of opportunities to profit from refinancing sub-performing properties and/or the associated sub-performing or non-performing loans.  These opportunistic investors are reportedly concentrating their acquisitions and investments in selected geographic regions where they perceive an upside in future rent growth bolstered by a constrained supply of competing housing. The new capital that is beginning to flow into these at-risk properties will inevitably put upward pressure on rents to produce a risk-appropriate yield for the bridge investor if market forces alone drive loan production and institutions in the secondary market do not become involved in the process.  This fact alone threatens the preservation of affordable housing.

What Can Be Done

History has proven that in times like these, a targeted government intervention is necessary to preserve affordable housing.  The Government Sponsored Entities (GSEs), i.e., Fannie Mae and Freddie Mac have a strategic goal to provide liquidity in the market “without impending participation of private capital”.  Given the current situation and the presence of opportunistic capital, it may be prudent for GSEs to increase their presence and for FHFA to revisit the multifamily caps imposed on the enterprises.  GSE’s increased participation in the multifamily securitization market can ensure governance that would otherwise be dominated by the priorities of opportunistic investors.

We believe that the GSEs could have a substantial influence beyond providing needed liquidity.  The terms under which the GSEs would purchase refinanced multifamily loans involving properties with re-balanced debt and equity would have a major influence on how these transactions are structured and how the parties accommodate the requirements for maintaining affordability.  They would be able to influence ownership structures that promote transparency; institute regulatory requirements that could align rent increases with changes in operating costs and preserve and promote fair and affordable housing.


[1] Richard Hill, “The commercial real estate debt market: Separating fact from fiction” Cohen & Steers, at

[2] Samantha Rowan, “Outlook: Market sees securitization solution should banking woes rise”, Real Estate Capital USA at

[3] Trepp defines at-risk loans as those whose debt service coverage ratio (DSCR) based on net cash flow is less than 1.25x.  Trepp estimates that the total at-risk cohort of CRE loans maturing in the next two years is approximately $87.7 billion of which more than 40% are backed by multifamily properties.  The remaining are backed by office, industrial, lodging, retail and mixed use properties.

[4] Rowan, op cit.