Veteran real estate managers have seen this movie before, most recently during the global financial crisis, when many predicted widespread distress from a wave of maturities set to come due. But that did not come to pass as many lenders opted to extend the debt rather than foreclose. While there are similarities to those days, there are also differences, Mr. Gul said.
In the global financial crisis, everything happened all at once. This cycle, rising interest rates are having a rolling impact on real estate, first making financing costs more expensive and then, with the banking crisis, making financing less available, he said.
"The effects of rising (interest) rates will continue to ripple through," Mr. Gul said.
Apartments aren't expected to slide by unscathed by the debt maturities scheduled to come due this year, industry executives said.
"There are a number of owners who are going to find it difficult or cost prohibitive to refinance their properties," said Sean Burton, Los Angeles-based CEO of multifamily real estate manager Cityview, which has $3.5 billion in assets under management.
"Those who levered up their assets with variable rate debt in order to seek higher returns will also face challenges as their short-term interest rate caps expire and the expected rent growth doesn't materialize," Mr. Burton said.
Real estate owners that bought apartment properties at 70% to 80% leverage with floating rate debt and a two-year cap on interest rates are starting to see those caps mature, Mr. Burton said in an email.
This is causing interest costs to far exceed project-level net operating income on multifamily properties, he said.
"This negative leverage (or increased negative leverage) is going to require a capital infusion that not all property owners are able or will want to make, likely resulting in more properties hitting the market from sellers who have more urgency to transact," Mr. Burton said.
In addition, some real estate managers bought properties with aggressive underwriting assumptions in 2021 and 2022, he said.
"These owners are going to be forced to sell or give (multifamily) assets back to the bank, which will result in more motivated sellers and therefore more transactions," Mr. Burton said.
This will likely result in some winners and losers in multifamily, but not a long-term fundamental disruption in the sector, he said.
"After all, as long as the population continues to grow, people will still need a place to live," Mr. Burton said.
Andrew Schardt, Conshohocken, Pa.-based head of investment strategy, co-head of investments and co-head of direct credit at Hamilton Lane Inc., said there will be "pain and distress" to come across the commercial real estate market because the expected return on property, called a capitalization rate, has not gone up as much as financing costs have. Hamilton Lane had $57.2 billion in private credit assets under management and supervision as of Dec. 31.
Commercial real estate debt is secured by a fixed building that is relatively illiquid, he said.
Real estate credit managers have seen a spike in demand.
"Right now, there's tremendous demand for the product" due to the significant pullback from real estate lending by regional banks due to the turmoil in the regional and community banking system as well as large money center (or non-consumer) banks, said Douglas W. Lyons, Chicago-based managing principal for real estate manager Pearlmark.
It's very challenging to get credit in commercial real estate, which is a "tremendous opportunity for Pearlmark" and its partners, Mr. Lyons said.
Recently, Pearlmark partnered with Waterton to provide construction financing in the form of a $53.2 million mezzanine debt investment for the development of the first phase of South Pier at Tempe Town Lake, which is close to Arizona State University. The first phase includes three towers with multifamily units, parking and commercial space.
Waterton primarily invests in value-added multifamily properties but "has always played in various debt instruments," including providing rescue financing instruments, said Rick Hurd, Chicago-based managing partner, investment management at Waterton.
In this environment, providing rescue capital for those property owners or developers with existing debt and helping them raise the equity needed to refinance, meets Waterton's value-added return requirements.
There's close to $1 trillion of debt in the multifamily sector coming due in the next four years, Mr. Hurd said.
And the percentage of borrowers with higher leverage floating-rate loans that will have the hardest time refinancing their debt is "pretty significant," he said.
The greatest amount of distress and need for fresh equity will be for bridge loans that were used to acquire multifamily over the last three years that are coming due, Pearlmark's Mr. Lyons said.
Bridge loan maturities will create a need for a solution such as a new senior mezzanine loan and fresh equity, he said. If the property owner doesn't have new equity to invest, there could be forced sales in multifamily, Mr. Lyons said.
Three years ago, no one was predicting negative cash flows, Mr. Hurd said. In addition to facing higher loan costs, the cost of buying an interest rate cap required by multifamily lenders has gone from $100,000 to millions of dollars today, he added.
Waterton has $9.7 billion in assets under management. Pearlmark has approximately $1.1 billion in assets under management.