Short Sellers See Distress Emerging in Apartments as Borrowing Costs Surge

(Bloomberg) — Soaring rents and cheap funding made blocks of US rental apartments seem like a “can’t miss” investment during the pandemic. Developers piled in to take advantage by constructing millions of the multifamily units, while investors snapped up older complexes to renovate them.

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Since then, borrowing costs have surged, and now there are emerging signs that some borrowers will struggle to refinance, Fitch Ratings said on Thursday. Rents are stabilizing, landlords’ expenses have risen and competition has grown, which will cause the delinquency rate for the assets to double this year to 1.3%, exceeding the pandemic peak, according to the ratings company.

The warnings come as more than $1 trillion of multifamily debt is due to mature through 2028, according to data compiled by Trepp, potentially leading to increased defaults and losses for banks and bondholders. While the problems are not seen as systemic, short sellers are moving in to try to profit from the emerging distress.

“I expect a great deal of pain in multifamily as we adjust to a higher interest rate environment along with a lot more supply hitting the market in 2024,” said Daniel McNamara, founder of hedge fund Polpo Capital, which is betting against commercial mortgage bonds.

McNamara’s short positions are focused on offices, which have been battered by the work-from-home trend, but the derivatives he uses for those bets sometimes have some exposure to apartment rentals.

Viceroy Research, meanwhile, said in November that it was shorting Arbor Realty Trust Inc., a lender to US apartment landlords, arguing that the lender is burdened with distressed loans that were bundled into commercial real estate collateralized loan obligations. Arbor declined to comment.

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Multifamily assets valued at more than $67 billion are potentially distressed, the most of any property asset class,…