The multifamily debt distress everyone forecast in 2023 arrived on schedule. The foreclosure inventory did not. Occupancy held, concessions stayed low in markets that were never overbuilt, and lenders — mostly agency lenders — chose to extend terms for borrowers willing to write a check rather than take back assets they knew how to underwrite in the first place.
Dean Zander has brokered apartment deals in Southern California for close to four decades, and he frames the problem precisely: the distress is in the debt, not the operations. A five-year loan written at 3.11% on 50% leverage can appraise out at 72% leverage at maturity without the borrower ever drawing another dollar. That is a balance-sheet event, not an operating failure, and lenders treat it differently.
Below: the LTV math that catches owners off guard, what agency lenders actually require before they extend, what buyers are underwriting now that the three-to-five-year exit is gone, and how to get brokers to call you back when sellers outnumber willing buyers.
Key takeaways
- Rate resets re-price the asset, so leverage moves against you even if you never borrow more — Zander’s 50% LTV loan at 3.11% appraised at 72% LTV once the new rate hit 5.98%.
- Agency lenders (Fannie, Freddie, HUD) have staffed workout departments and no fear of owning assets. They extend for liquid, transparent borrowers who bring equity; an owner demanding a loan mark-down with no cash in gets foreclosed.
- The buy is over-leveraged newer lease-up product trading 25–30% below replacement cost — occasionally 50% — not $25–30K/unit renovations on 1970s stock.
- Leveraged IRR models have stretched from three-to-five years to seven-to-ten, underwritten to long-term debt staying in the high 5s to low 6s.
- Ground-up only pencils above roughly $5–$5.50/SF in rents, or about $1,200/SF in condo sales — otherwise two years of entitlement plus a year out of the ground doesn’t reach an exit the comps support.
From the Real Estate Pros Show
This article draws on an interview with Dean Zander of Newmark on the Real Estate Pros Show, hosted by Dylan Silver.
The Distress Is in the Debt, Not the Operations
Ask an operator in Southern California where the pain is and you will not hear about vacancy. “I don’t know that the operators are necessarily experiencing distress,” Zander says. Housing unaffordability is generating demand on its own — residents stay longer, take on a roommate, and figure it out.
Occupancy is strong. Concessions are low, because most markets never saw the overdevelopment that produced concession wars in places like Austin and Nashville. Rent growth has slowed from the 2021 pace, but it did not break.
What broke was the capital stack. Adjustable-rate loans placed a few years ago at 3% or 4% looked affordable at the time. They reset near 6%, cash flow got crimped, and then the loan came due — with the borrower short on equity to refinance at current values. That is the entire mechanism behind today’s multifamily debt distress.
The distinction matters for buyers because it changes what a “distressed” seller looks like. You are not buying mismanaged, half-empty buildings at a discount. You are negotiating with owners whose properties run fine but whose debt no longer works, which means the seller has options — extend, recapitalize, or wait. Zander’s own read on the buyer pool: sellers outnumber willing buyers right now, and the ones sitting on the sidelines waiting for a cataclysmic event are, in his view, waiting for something that is not coming.
Operating cost pressure is real — taxes and utilities keep climbing, though insurance has settled somewhat. But rising expenses are a margin problem. A maturing loan at double the rate is a solvency problem.
The LTV Math That Surprises Owners at Refinance
Here is the mechanic that catches conservative owners, not just aggressive ones. Zander bought a building years ago and, per his own rule, never put more than 50% debt on any property he owns. He wrote a five-year loan at 3.11%, at 50% loan-to-value.
When it came time to refinance, that 50% LTV loan was a 72% LTV loan. He never borrowed another dollar. The value of the property dropped enough — as the rate went from 3.11% to 5.98% — to move the ratio 22 points against him.
The reason is that the rate move re-prices the asset. Higher debt cost pushes cap rates out, cap rates set value, and your loan balance is a fixed number sitting on top of a shrinking denominator. The borrower’s behavior is irrelevant to the outcome.
“Fortunately, because my position was fine in the property, it could absorb that,” Zander says. That is the point of the 50% rule: it built in room for exactly this. An owner who wrote the same loan at 70% or 75% LTV in 2020 is looking at a refinance appraisal above 100% of new value, which is where the equity call becomes existential rather than annoying.
Two practical implications for anyone placing debt today. First, stress-test the refinance at an exit cap derived from a rate materially higher than what you are borrowing at, not at your going-in cap. Second, the amount of leverage you can survive is a function of loan term, not just DSCR at close — a ten-year term gives value more time to catch up to the debt than a five-year term does.
I’d never put more than 50% debt on any of my properties, and I had a five-year loan at 3.11. And when it came time for me to refinance, that 50% LTV was 72% because the value of the property dropped that much.
— Dean Zander, Newmark
How Lenders Actually Decide: Extend or Foreclose
The reason the foreclosure wave never materialized is not that lenders are afraid to own apartments. They went through the last cycle, they know what it looks like, and they built the infrastructure for it. “They have operations set up and departments set up to handle that and professionals in place,” Zander says.
What changed is who holds the paper. The dominant lenders in multifamily today are agency — Fannie Mae, Freddie Mac, and HUD — a different animal from the regional bank balance sheets that drove past cycles. Agency lenders will work with a borrower who meets three conditions:
- Liquidity. The borrower has cash and can demonstrate it.
- Transparency. Full sharing of operations and what is actually happening at the property.
- Willingness to bring equity. Paying the loan down, or a cash-in refinance.
Miss the third and the conversation ends. Zander is blunt about the borrower who walks in and says he cannot afford to pay it down, will not put money in, and wants the loan marked down: “That’s a hard no. They will foreclose on that. I don’t think there’s any fear of that.”
He also pushes back on the idea that this is kick-the-can. In the last cycle, extensions were often pure delay. This time, “you have to meaningfully put some equity in in order to make the deal work, or you do a cash-in refi.” Most owners are doing it, because they are liquid enough, they still believe in the asset, and the alternative is a credit event that damages their ability to borrow for years.
For buyers, this is the uncomfortable conclusion: the equity is being recommitted, not surrendered. Waiting for the lender to hand you the asset is a poor acquisitions strategy.
What Buyers Are Actually Underwriting Now
The three-to-five-year hold is largely gone. Investors underwriting to a leveraged IRR are now running the model to the full seven- or ten-year term rather than assuming an early exit, and they are assuming long-term debt stays in the high 5s to low 6s — not a return to 3%, 4%, or even 5%.
The bigger shift is where the return comes from. The classic play — buy untouched 1970s or early-80s vintage, spend $25,000 to $30,000 a unit on granite and washer-dryers, exit in three years — is no longer the unicorn it was. Family offices still hunt it, largely because institutions and funds have vacated that space. But the focus has moved from renovation spend to entry basis.
The best expression of that: newer product, built by a developer who over-leveraged it and did not hit lease-up expectations. Those buildings are trading at a real discount to replacement cost — generally 25% to 30%, sometimes as much as 50%. You get modern construction, no deferred maintenance, and a basis a developer cannot compete with.
On rent growth, Zander applies a specific test rather than relying on metro-level job and migration data. Southern California already has the job market; that tells you nothing property-specific. Instead, look at median income in the immediate area against in-place rents, holding to the 30%-of-income ceiling. If the area’s income level leaves room to take rents up 10% or 12% and still stay under 30% — and you are outside rent control — the growth is achievable. If it does not, no amount of renovation creates it. That test is also the reason better locations consistently outperform inferior ones.
Why Ground-Up Development Doesn’t Pencil Against Discounted Product
Developers who were active last cycle are buying core-plus communities instead of building them, for a straightforward reason: they can acquire finished product far below what it costs them to deliver it.
Run the timeline. Buy land, spend two years entitling it, another year getting out of the ground, then lease up and stabilize — and then exit into comps that do not support the value you need. When existing buildings sell 25% to 30% below replacement cost, the development spread is negative before you start.
Zander’s thresholds for what still works: rents that can substantiate over $5 a foot, perhaps $5.50, or roughly $1,200 per foot in sales to justify condos. Condo development carries extra drag beyond price — construction defect law and the time required to sell out. Conversions face a different wall: parking requirements better than two-to-one, which older buildings rarely satisfy.
The one genuinely active pipeline is dense, 100% affordable product built with incentives to maximize the lot. The math there is different:
- Sites acquired at $15,000 to $30,000 per unit
- Roughly 100 units squeezed onto a 15,000-square-foot lot
- Four-to-six-story stick construction, minimal or no parking beyond possibly one ground-floor level
- HUD vouchers as the outcome that turns it into what Zander calls a home run
Rent to conventional affordable tenants instead and the returns compress. Exits on no-parking dense product are also tougher. But it is the most active development play in the market right now, and it is a fundamentally different business from chasing $5.50-per-foot market-rate rents.
How to Get Called Back by the Brokers Holding the Inventory
Deals that used to take 30 to 40 days on market now take 60 to 90. There are more groups that want to be sellers than want to be buyers, and buyers are patient — the working assumption is that whatever they do not buy today will still be there tomorrow.
That means broker attention is the scarce resource, and the fastest way to lose it is a blast email. “Some of them say, send me anything you have that’s better than a seven cap, and that person doesn’t get a return call,” Zander says. He does not know an owner in Southern California who needs to sell at that number.
What actually gets a callback:
- React to their actual inventory. Reference a specific listing, explain why it does not fit, then describe precisely what does. That is a conversation about your buy box, not a cap-rate filter.
- Bring the broker an owner, not a criteria sheet. Investors who drive a property or hear about a recapitalization and ask the broker how well they know that owner — and whether they will send an unsolicited offer — get deals. Zander has run that play successfully many times.
- Target need, not desire. Owners who “want to sell but know this isn’t the right time” will wait another year. The ones who transact have a trigger: fund life ending, a debt maturity, a merger. Ask brokers which of their owners have one.
Track record also compounds on the debt side. Lenders are markedly more favorable to borrowers with existing relationships — accounts, prior loans, demonstrated management and liquidity. A new sponsor shopping for debt cold pays more and clears more hurdles, with every line item of the operating statement underwritten.
Frequently asked questions
Why hasn’t the multifamily loan maturity wave produced distressed foreclosure inventory?
Because the problem is the debt, not the property. Occupancy is strong and concessions are low in markets that were not overbuilt, so the assets themselves perform — they simply cannot carry a loan that reset from 3% to near 6%. Lenders faced with a performing building and a short-on-equity borrower generally extend rather than foreclose.
The second factor is borrower liquidity. Most apartment owners in this cycle have cash and long-term conviction in the asset, so they put equity in rather than hand over the keys and take a credit hit that limits their borrowing for years.
What does a lender need to see from a borrower to extend an apartment loan instead of foreclosing?
Three things: liquidity, full transparency on operations, and a willingness to bring equity — either paying the loan down or completing a cash-in refinance. Agency lenders dominate multifamily today and have staffed workout departments from the last cycle, so they are not reluctant to take an asset back if the borrower will not participate.
The request that guarantees a foreclosure is asking the lender to mark the loan down while contributing nothing. Dean Zander describes that as a hard no.
How can a 50% LTV loan become a 72% LTV loan at refinance without borrowing more?
The interest rate move re-prices the asset. Higher debt cost pushes cap rates out, cap rates determine value, and your loan balance stays fixed while the value it is measured against falls. Zander’s own building went from 50% to 72% LTV as the rate moved from 3.11% to 5.98%.
The takeaway for new debt is to stress-test the refinance at a value derived from a materially higher rate than you are borrowing at, and to weigh loan term as heavily as day-one DSCR.
Is it better to buy discounted newer apartments or renovate a 1970s-80s value-add building right now?
The weight has shifted toward basis over renovation spend. Newer, over-leveraged product that missed its lease-up projections is trading generally 25% to 30% below replacement cost, sometimes as much as 50% — a discount that is difficult to manufacture by spending $25,000 to $30,000 per unit on an older building.
Older value-add still works for operators who genuinely run that business, and family offices are active there precisely because institutions have stepped back. But the classic three-year granite-and-washer-dryer exit is not the reliable trade it was.
What rents or sale prices per square foot does ground-up multifamily or condo development need to pencil?
Roughly over $5 a foot in rents — perhaps $5.50 — for market-rate rental, or in the neighborhood of $1,200 a foot in sales to justify condo construction, according to the developers Zander works with. Below those levels, two years of entitlement plus a year out of the ground plus lease-up does not reach an exit the comps support.
The exception is dense 100% affordable product: sites at $15,000 to $30,000 per unit, around 100 units on a 15,000-square-foot lot, four-to-six-story stick with little or no parking, with HUD vouchers making the return work.
The bottom line
Stop building an acquisitions plan around inventory the lenders are not going to release. Point your outreach at owners with a dated trigger — a fund winding down, a maturity, a merger — and at newer lease-up product where the developer over-leveraged, then underwrite it on basis against replacement cost with debt held in the high 5s to low 6s for the full seven-to-ten-year hold.
