Real estate investors, particularly personal investors without any backing from major financial institutions, are now feeling distressed amid the current condition of the property market in the United States, according to a report.
In the commercial real estate industry, much of the worry is centered on the office market, where vacancies have reached a record 18.1% in the first quarter of 2024. The vacancy, spurred by companies downsizing and switching to a hybrid or remote working model, is causing about $38 billion in potential distress for investors.
However, there is one type of real estate that makes up the lion's share of properties, causing potential distress among personal investors: multifamily apartment buildings. In fact, more than $56 billion worth of multifamily properties are now at risk of financial trouble, Bloomberg reported, citing data from MSCI.
Who Experienced the Brunt of High Interest Rates in the Housing Market
Many investors who put money in upstart landlords and crowd-sourced investment firms like Western Wealth Capital are now struggling due to the high interest rates. Wealth Capital works on a lending model where they provide safe loans for borrowers with short track records and small down payments.
However, the trouble began when interest rates began spiking two years ago, peaking at 8% in October 2023. The values of homes and apartments also fell after a significant supply of newly built apartments entered the market, leading some investors to lose money, the media outlet noted.
These things led to a decline in the sale of apartment buildings, which fell to $28 billion in the fourth quarter of 2023. That is down 80% from 2021, Bloomberg noted.
To pay for debt, Wall Street companies offering these short-term loans, including Wealth Capital, needed to sell buildings at steep losses. Other companies tightened the limits on shareholders' ability to pull money to preserve liquidity.
It is unclear how the housing market can go and whether investors may recover from the situation. However, low housing affordability caused by rising home prices and elevated mortgage rates has fueled rental demand across many housing markets. Renters are also more likely to stay put as many are priced out of homeownership.
