Dive Brief:
- The financial issues at some Houston-area apartment complexes go well beyond the widely publicized problems at Dallas-based Applesway Investment Group, according to recent reports.
- The Landings at Northpoint, a 292-unit complex in the Greenpoint neighborhood, will be sold at a foreclosure auction on Oct. 3, according to Bisnow. The Real Deal said the property, owned by an LLC linked to Michigan-based investor Dylan Borland, received a $20 million loan from Prudential Affordable Mortgage Company in 2021. Special servicer CWCapital now oversees the loan.
- Earlier this month, MF1 Capital foreclosed on a 282-unit complex in Houston after making a $49.9 million bid for the property. The previous owner, Houston-based Rockstar Capital, defaulted on a $51 million loan tied to the property. MF1 provided that loan and subsequently rolled it into a packaged loan obligation, according to The Real Deal.
Dive Insight:
Rockstar’s problems mirror those many other apartment firms are facing right now. By the end of 2022, the debt service coverage ratio dropped to 0.96 at Rockstar’s 282-unit complex in Houston. At the same time, occupancy had fallen below 75%, according to The Real Deal.
Rockstar took cheap debt at a time when rents were booming, according to The Real Deal. But then when their interest rates rose, these owners faced skyrocketing costs as rent growth began to slow.
“Back in 2021, nobody was expecting rates to go up,” Venkat Avasarala, founder of Dallas-based Stryker Properties, told Multifamily Dive.
In April, Applesway defaulted on nearly $230 million in loans and lost five properties, totaling 3,200 units, to foreclosure. The loans on the four properties were originated at the top of the market before interest rate increases started to dent values.
“People couldn’t get their hands on enough class A properties,” Avasarala said. “So then they went after class B, and then they went after class C. Then all of these properties were trading at five caps — A’s, B’s and C’s — as if there was no difference between them. That is where the business model broke.”
To be profitable, these apartments need to be bought at a better price. “These C-Class properties should be traded at a higher cap rate, like they used to — at eight cap, nine cap, ten cap or something like that,” said Avasarala, who said he anticipated problems when he sold his portfolio in September 2021.
Avasarala expects more Houston owners to face issues in the coming months.
“Texas has additional problems of high property taxes and insurance,” he said. “So the battle is on three fronts and not one. In Houston, there is no zoning and it is overbuilt, causing rent growth to be anemic forever while expenses soar.”
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