Multifamily Refi Deals Struggle Without Fresh Equity

Apartment borrowers trying to refinance peak-era acquisitions are running into a higher equity requirement. According to Bisnow, bridge lender Inland Mortgage Capital is receiving many multifamily refinancing requests. Borrowers often resist contributing additional capital. That makes troubled refinancings harder to approve when current cash flow cannot support existing debt.

Multifamily Refinancing Meets Higher Rates

The financing backdrop has become more difficult. The 10-year Treasury yield moved above 5% for its first sustained period since 2007. The Federal Reserve also raised its benchmark rate Wednesday for the first time since 2023. Those moves add pressure to loans originated when borrowing costs were much lower.

IMC President Art Rendak said acquisition loans are currently easier to win. Those deals often arrive with fresh equity and a sponsor entering at today’s basis. Refinancings can involve borrowers whose original business plans have not worked and whose debt-service coverage has weakened.

Rendak said investment committees struggle with borrowers whose coverage has already fallen below sustainable levels. He cited the example of a borrower near a 0.9 debt-service coverage ratio seeking replacement debt after the prior lender wants out.

The Details

The Mortgage Bankers Association says lenders and investors hold about $5T of outstanding commercial mortgages. About 17%, or $875B, are scheduled to mature this year. The total includes 13% of mortgages backed by multifamily properties.

IMC makes floating-rate bridge loans nationally from $5M to $20M, with terms up to three years. Multifamily accounts for 43% of its portfolio, largely Class B and C properties. Since 2003, the lender has originated more than $1B of nonrecourse first-mortgage bridge notes.

Sun Belt Vacancies Complicate the Refinance Math

Refinance pressure is especially visible where rents have not met underwriting assumptions and vacancy has increased. Cushman & Wakefield put second-quarter multifamily vacancy at 15.7% in San Antonio, 12.7% in Austin, and 11.6% in Phoenix.

IMC has completed only one refinancing since the pandemic, a June hotel-to-multifamily conversion in Madison. Rendak described it as a special case with strong market fundamentals and a borrower willing to add equity.

Those vacancy figures align with Rendak’s concern about markets where rent growth has missed sponsor expectations. In those cases, borrowers may need new debt before the original business plan has recovered.

Why It Matters

Existing lenders have often delayed foreclosures on troubled 2020-2022 acquisitions, particularly in the Southeast. Many have hoped lower rates or tighter cap rates would improve exit values. Persistent 2021 and 2022 multifamily loan stress makes that wait-and-extend approach harder to sustain.

Rendak said capital must enter these projects and debt bases need to reset before lenders can comfortably fund them. That could happen through discounted payoffs, short sales, or other resolutions that reduce leverage.

Rendak said some Southeast deals are in deep trouble, yet lenders remain reluctant to take control. He argued that resetting the basis could move assets to better-capitalized owners and make new bridge financing more realistic.

Many lenders have instead waited for rates to fall or cap rates to compress. Rendak said the elevated-rate environment may last, making repeated extensions less workable. He believes banks can reset bases through short sales or discounted payoffs rather than keep weak capital structures unchanged.

What’s Next

Multifamily still attracts significant capital, but debt funds and banks are unlikely to refinance weak deals without fresh equity. Rendak expects existing lenders to eventually accept discounts that create a workable basis for new financing. The next phase of the cycle will depend on how quickly lenders recognize losses and how much new capital sponsors can bring. He said lenders may eventually need to offer roughly 15% discounts to help borrowers find a new financing home.

That gives well-capitalized buyers an opening, but only after legacy debt is reduced to a financeable level.