How casual investors lost big in commercial real estate

Apartment flipping investment strategy implodes

How casual investors lost big in commercial real estate

The allure of real estate investing has drawn many casual investors into apartment syndications, where groups of investors pool money to buy and renovate properties. But as interest rates spiked and property values plunged, that investment strategy is now producing steep losses.

A Bloomberg report highlighted the growing distress among investors and the broader implications for the commercial real estate (CRE) market.

Syndicators pool funds from individual investors to acquire and renovate multifamily residential buildings, often using risky levels of debt financing.

The model proved extremely profitable during the pandemic housing boom as home prices and rents soared amid severe supply shortages. But it has quickly unraveled as the Federal Reserve's aggressive rate hikes make those leveraged bets unaffordable.

"When you're at a casino, you know what you're doing is gambling," said Aleksey Chernobelskiy of Centrio Capital Partners, which helps retail investors try to salvage their investments in struggling multifamily deals. "Here, people were gambling but they didn't know it."

One of the largest syndicators, Western Wealth Capital, has seen the valuations of multiple properties in its portfolio crumble, according to CEO Janet LePage. Some investor equity has been essentially wiped out due to "devastating devaluation" at complexes like Heather Ridge in Arlington, Texas.

Casual investor Lynn Nathe said she's suffered seven-figure losses on Western Wealth apartment investments that proved far riskier than advertised.

"I feel guilty," she told Bloomberg. "It was my own stupidity."

Yet Nathe went on to invest over $1 million more from her husband's 401(k) with other syndicators chasing apartment upside.

While celebrated as a savvy play on America's housing shortage, the syndicator model is now unraveling at a breathtaking pace. And the ripple effects are straining far corners of Wall Street.

Six of the seven biggest commercial real estate borrowers ensnared in troubled debt vehicles known as CRE CLOs (commercial real estate collateralized loan obligations) are multifamily apartment syndicators, according to data from Trepp. Those firms collectively have almost $4 billion in outstanding CRE CLO debt set to mature this year.

The $80 billion CRE CLO market overall is facing record 8.6% distress levels in 2024 as landlords grapple with ballooning interest costs on securitized loans bundled into the securities. Major apartment lender Ready Capital saw delinquency rates more than triple in the first quarter.

While distress in the office sector has dominated real estate headlines, multifamily residential buildings represent the single largest share of potentially troubled properties at over $56 billion, eclipsing even offices, according to analysis firm MSCI's data.

"It has the same kind of flavor as nonbank lenders in the subprime space. The more highly-levered deals go down first," said Tomasz Piskorski, a real estate finance professor at Columbia Business School. "It's an early manifestation of risk."

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Piskorski said that while the syndicator problems are unlikely to threaten broader financial stability, they expose fissures that resemble the origins of the Great Recession housing crisis over 15 years ago.

Lured by the prospect of earning bigger returns from America's stubborn housing shortage, individual investors poured billions into syndicator-managed value-add apartment plays that relied heavily on cheap debt financing to maximize returns. But this speculative model has buckled under the weight of rapidly rising mortgage rates.

"Many firms, including [Western Wealth], failed to anticipate the speed and magnitude of interest rate increases," LePage admitted in an email to Bloomberg.

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