Foong on Finance with Keat Foong: Worse Is Yet to Come

If you have been reassured by President Obama’s ca...

If you have been reassured by President Obama’s calm demeanor and are feeling more relaxed these days, there is an opinion article in a recent issue of The New York Times entitled “The Economy is Still at the Brink.” In case you miss the point, an illustration accompanying the article says, in big, black, artistic, letters, “The Storm Is Not Over, Not By A Long Shot.”
In the multifamily sector specifically, if the number of outfits being created that are specializing in turnarounds is any indication, players may be expecting the trickle of distressed assets and property owners to become more of a flood later on.

“There is about $18 billion worth of apartments under some stage of distress now,” says Michael Kelly, president and co-founder of Caldera Asset Management, which recently announced it is providing comprehensive services for turning around distressed multifamily assets. Kelly says the amount of such troubled assets could grow exponentially in the near future. “In the next two years, this number could be substantially higher as loans come due.”

Many of these properties were the ones that were purchased during the mid-2000s boom, at high prices and based on aggressive projections of future income. As the expected higher incomes did not materialize, these assets may be having difficulty paying their debt servicing costs and expenses. And if these assets are not already short of cash, when their loans mature they will have trouble refinancing the existing debt.

Even if they were not aggressive plays, many assets will face trouble refinancing loans in the next few years if the value of their properties and income fall. According to the Mortgage Bankers Association, large volumes of short-term multifamily loans—the ones that were made in the midst of high real estate prices—will be maturing after 2010, in 2011 and 2012.

According to Caldera Asset Management, $12.31 billion in equity will be needed to refinance properties that were acquired in 2007 alone. The company predicts the problem will not just get worse over the course of the recession, but “long after the recession ends”—”as the larger wave of overvalued assets and loan maturities sweep the market.”

(Keat Foong is executive editor of Multi-Housing News. She can be reached at