Cheap floating-rate debt available in 2021 isn’t so any more.
That’s why investors should be cautious of floating-rate commercial real-estate loans packaged into bond deals, according to credit researcher Lea Overby and her team at Barclays.
As an example, Overby on Thursday highlighted a report that Houston-based Nitya Capital has been looking to sell about 40% of its multifamily portfolio, because interest rate hikes by the Federal Reserve have made its floating-rate debt more expensive to manage, according to Real Estate Alert.
The report, citing an investor letter from Nitya’s CEO, pointed to falling property values and $2 billion of senior debt on 60 properties that cost $60 million more annually in interest than in 2021, when it took debt out.
“While the rents on the portfolio have gone up by 22% under its ownership, the portfolio is cash-flow negative due to rising interest rate costs and the firm is covering the shortfall,” the report said.
Nitya didn’t respond to a request for comment for this article.
Overby at Barclays tracked down about $1.1 billion of Nitya commercial real-estate loans in various commercial mortgage bond deals, most of which is floating-rate debt.
The last decade has given rise to so-called “CRE CLOs,” a kind of fund where billions of dollars in floating-rate loans on commercial properties gets packaged into bond deals. They are a distant cousin of CDOs that made headlines in the wake of the 2007-2008 global financial crisis.
From the Archives (2021): This real estate debt is roaring back to fund commercial properties thrown into flux by pandemic
Nitya hasn’t defaulted on any of its loans, Overby said, but warned that “as long as the fed funds rate remains high, interest pressure on floating-rate loans will remain elevated, as we would expect more of these transactions.”
The Fed policy-sensitive 2-year Treasury yield
TMUBMUSD02Y,
3.779%
was back above 4% on Thursday, but off its roughly 5% high last week. The 10-year Treasury yield
TMUBMUSD10Y,
3.376%
was at 3.58%, according to FactSet. The Dow Jones Equity REIT Index was down 0.3%
DJDBK,
+2.67%
Thursday, but about 20.6% lower from a year ago.
Multifamily properties have been considered a relatively stable, lower-risk investment, in part because of strong rental demand and a crisis of affordability for first-time homeowners.
Deutsche Bank this week pegged the total outstanding amount of U.S. multifamily loans at $2 trillion at lenders, of which 47% was financed with government backing and 33% was held by banks.
