MF1 Forecloses on Apartment; $205B Dry Powder Awaits More Distress

Good morning,

MF1 forecloses on apartment complex as $205B in dry powder awaits more distress, and rent growth cools further. Let’s delve into today’s topics.

📈 Market Update

⚠️ MF1 Forecloses on Apartment; $205B Dry Powder Awaits More Distress

MF1 Capital has filed to foreclose on an apartment in Houston owned by Rockstar Capital, after Rockstar defaulted on a $51M floating-rate loan from MF1. With rising interest rates, Rockstar's debt service coverage ratio dropped below 1 and occupancy fell below 80%, triggering a default. This appears to be MF1's first foreclosure, after previously restructuring other distressed deals. Rockstar says it made proposals to modify payments but the lender was unwilling, so foreclosure is proceeding.

Distress Funds Circling
Investors are sitting on over $205B in dry powder, waiting for the peak in distressed properties and foreclosures over the next 6-12 months before investing, though the opportunities are uneven across sectors. Office properties are most distressed, having lost 31% in value, while industrial remains strong. Though $626B in CRE loans mature through 2024, the level of distress is unlikely to match the tidal wave after the 2008 financial crisis. Rising Treasury yields closely link to falling CRE values, with estimates that each 100 bps increase in 10-year rates leads to a 60 bps rise in cap rates, equivalent to an approximate 25% drop in prices.

❄️ Rent Growth Cools Further

The Apartment List National Rent Report shows rent growth continuing to moderate in September 2023. Annual rent growth turned negative for the first time since the pandemic began, currently standing at -1.2% YoY. Monthly rents also fell 0.1% in August, an early start to the typical seasonal cooling. Rental market weakness reflects improving apartment vacancy rates, which have risen above pre-pandemic levels to 6.4% as new construction expands supply.

Sunbelt Chills While Northeast and Midwest Remain Stable

✍️ Further Reading

• Buildings Are Empty, Now They Have to Go Green (WSJ)

• JPMorgan Sees City of London Office Values Falling 20% This Year (BBG)

• Wall Street Gets Tough on Return-to-Office Laggards (BBG)

• Google Adds to Texas Bandwidth With New $600 Million Data Center (CS)

• Blackstone Sells Control of 11-Property New York Apartment Portfolio (CS)

• Airbnbust? NYC’s Short-Term Rental Restrictions Set to Take Effect (RD)

• How Developers Could Relocate a Full-Growth Forest — One Tree at a Time (CS)

📊 Chart of The Day