The value-add apartment strategy is collapsing. Syndicators bought older buildings, renovated them to raise rents by a third, then refinanced cheap. Now interest rates are up and rent growth has stalled from record new supply. Many recent deals are in trouble.
Part of the problem in multifamily is certainly that a lot of syndicators got into the business. And the mistake most of them have made is they got in and they did the typical model where they buy an older building and they want to remodel that building and re tenant the building and hopefully get rent that's about one third higher than they're getting now. And that's been a very good model because what they'll do is they'll fix up the property with short term financing and they'll buy it with short term financing and then they'll fix it up, get new tenants in, make the books look a lot better, and then they'll refinance it with long term debt that's at a much lower rate. But guess what? The rates went up and they didn't count on that. So they're in trouble. And to add insult to injury, the rents have softened because there is a lot of multifamily construction that has occurred over the past few years. And literally this year, as we speak, a record number of new multifamily units is hitting the market.
