Life Insurers Have $234B in Exposure to Apartments

For now, Moody’s analysts see problems with office-related investments nearing a bottom but continuing to get somewhat worse. “The weight of work-from-home on occupancy and the large drops in valuation have made refinancing more difficult,” the analysts write. “Deterioration in mortgage loan quality continues to lower valuations while increasing loan-to-value ratios, and loan delinquencies.”

Commercial real estate owners typically finance properties with relatively short-term loans, based on the assumption that they can easily replace the old loans with new, similar loans. In recent years, a big increase in interest rates has pushed up the cost of refinancing.

Apartment building owners in most markets are benefiting from high occupancy rates, but they’re facing the same pressure from rising refinancing costs that office building owners are facing.

In a bad recession, apartment building loan values might be 18% higher than the apartment buildings’ resale value. In the office market, loan values might be just 16% more than the building resale values, according to Moody’s calculations.

Other views: Arbor Realty Trust analysts see the high number of households as a force supporting strong residential real estate prices.

Ralph Rosenberg of KKR Insights suggests that multifamily housing is facing cyclical problems, rather than the kind of long-lasting, work-from-home-driven challenges facing the office market.

In the multifamily market, “the influx of new supply is likely to taper off after 2025, at which point we are optimistic about rent growth given the structural shortage of housing,” he says.

Credit: Andrii Yalanskyi/Adobe Stock