Is Today Like the GFC for Multifamily?

My grandfather used to study the Civil War. He lived in Chattanooga, Tennessee, near the Chickamauga battlefield. On weekends, he’d walk the creeks looking for old Indian arrowheads, bringing home handfuls of them to fill picture frames. I can still picture him on the couch, watching old movies like Gettysburg or Glory. 

Some of that curiosity about history made its way down the line to me. It’s no surprise that many of the best investors are also students of history - constantly reading to understand where we’ve been and where we might be going. History doesn’t repeat, but it often rhymes. My hope is that by studying real estate and economic history, I’ll make better decisions for our firm and our investor partners.

Today’s post is short, but I wanted to share some data from CRED iQ that compares current distress levels to those seen during the Great Financial Crisis about 15 years ago.

Reminder: “REO” (real estate owned) assets are properties that have gone through foreclosure and are now owned by the lender after an unsuccessful auction or borrower default.

We’ve clearly seen an uptick from the post-COVID lows, but distress is still nowhere near GFC levels. 

In 2022 and 2023, there were plenty of calls for a major wave of distress, similar to what was seen during the GFC, given the massive wall of maturing loans that couldn’t support today’s higher interest rates. Many expected a surge in foreclosures, but so far, that hasn’t materialized in a meaningful way. There’s distress, but much of it is being worked out quietly behind the scenes.

Multifamily and Residential:

REO levels now sit at or below pre-GFC averages. That tells us lenders are holding far fewer distressed assets than before thanks to better risk management, valuation practices, and loan workout strategies.

Banks and lenders are more incentivized to extend loans with quality borrowers as opposed to taking them back en masse. The risk is still there to see higher levels of distress depending on market fundamentals, but I personally do not believe we will see it come to fruition. Lenders are lenders for a reason - they don’t want to own/operate assets. 

While that means fewer “fire-sale” opportunities for opportunistic investors, it also signals healthier loan books and more confidence in collateral values. Even if the economy softens, today’s early-detection tools and workout mechanisms make another GFC-level spiral unlikely.

That doesn’t mean there won’t continue to be pain for common equity investors. Unfortunately they will take the brunt of investing in deals at the peak of the market on short term loans. 

Regardless, between lender extensions, direct workouts, and the growth of private credit stepping in to bridge capital gaps, credit distress has been contained so far. Credit is still flowing and that, more than anything, is keeping the system steady.

You can read more about market cycles here.

Takeaway for investors searching for deals today:

Don’t wait on highly distressed opportunities that might not show up. Find a deal with a quality risk adjusted return, and reasonable assumptions behind those returns. Test downside scenarios. IF distress were to increase, cap rates would likely expand further. Move the exit cap rate on the deal you’re considering up 75-125 bps and see what happens to your deal. It won’t be pretty, but could you live with that outcome? If no, then don’t do the deal.

Of course there is nuance here depending on the deal. If you have any questions or want to bounce ideas off me, feel free to chat with me by replying to this email or hitting the “schedule a call” button below.

If you’re interested in North Carolina single-family development or existing multifamily opportunities, you can follow along by clicking here. I usually only come across 1–3 deals per year that are truly worth investing in.

Clay Stanley
704-608-8488
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