In recent quarters, we've noticed a significant retreat in new originations from commercial banks. This has been further exacerbated by prospective Dodd-Frank reforms aiming to establish additional safety nets for smaller banking institutions, avoiding the recent downfalls of Silicon Valley Bank and First Republic Bank.
Meanwhile, several debt funds have stepped in to fill the void, but their borrowing rates are not exactly affordable—often priced at 500 or more basis points over SOFR, leading to an all-in interest rate over 10%. If the Fed doesn't lower short-term interest rates and rents decline over the next year, additional stress could be placed on these products' borrowers upon refinance or sale.
The U.S. rental housing market, especially where new supply is being delivered, is buoyed by solid macro demand fundamentals. Consequently, it's improbable that both rents and the debt capital markets will remain suppressed for an extended period. It suggests that significant multifamily market distress is likely several quarters away and that the level of distress may not match the severity or duration of the post-GFC era.
While it's important to keep an eye on distress in the office sector, multifamily borrowers experiencing varying distress levels still have options with debt and equity sources. Real distress will only surface when those financing options evaporate and delinquency rates begin to rise.