Originally published on March 14, 2024, by Beth Mattson-Teig, for UrbanLand Magazine. 

Potential trouble brewing in a sector that has been viewed as relatively bulletproof multifamily is concerning. But while stress is very much real, industry participants are quick to point out that the overall foundation for multifamily remains strong. “The cracks that we’re seeing are not structural; they’re superficial,” says Vincent DiSalvo, chief investment officer at Kingbird Investment Management, a family office investment firm specializing in multifamily.

The obvious challenge is higher interest rates. Generally, long-term owners that are holding low leverage, cash flow-positive assets are just fine. The pressure points are hitting developers and investors who have bought or built assets within the last three years and are either holding expensive short-term debt or need to refinance into the higher-rate market.

“The distress that we’re starting to see is in groups that bought into the hype around the demographic shifts and have over-committed themselves to certain geographies,” says DiSalvo. Some investors were buying apartments at very aggressive cap rates of 3 percent or even sub-3 percent in high-growth markets such as Texas and Florida. For some investors, debt service is now 50 to 100 percent higher than what they projected it would be. “So even though you’ve done well on the income side, and you had a business plan you’ve successfully executed, your debt service has become so outsized that it is causing a real problem,” he says.