“Daddy always told me, with a knowing look
Every debt gets settled, in the devil’s book
You can’t run forever, down that twistin' road
Cause the chickens are comin, to collect what’s owed
Yeah - them chickens are comin’
To collect what’s owed”
- Chaotic Herman, 2025

Truth be told, I’m a bit of a deal junkie. I still love the adrenaline rush of working decades of relationships to find an interesting deal, talking about it, thinking about it and strategizing about it. So, it was a bit tough for me to spend two years sitting on the sidelines waiting for investment metrics to balance so that investing in something new made sense again.

I’m glad we waited. Looking in the rearview mirror, there was little that we missed out on over the last couple of years when interest rates jumped and remained elevated, and sellers’ pricing expectations did not match up with market conditions.

But today, things have started to change. The commercial real estate (CRE) sector is facing a significant volume of loan maturities in the coming years, with a notable portion of loans held by debt funds. Debt funds (non-bank lenders which provide financing for real estate projects), became prominent players in CRE lending during the go-go years of 2020-2022, when higher leverage was not available from traditional lending sources like banks, insurance companies and the government-sponsored entities (GSE lenders), Fannie Mae and Freddie Mac, primarily due to constraints on debt service coverage ratios. Here are a few specific observations about upcoming multifamily loan maturities:

• Peak Loan Maturities: According to CRE loan analytics firm Trepp, approximately $2.8 trillion in CRE loans will mature between 2024 and 2028. Of this, an estimated $533 billion is scheduled to mature in 2025.
• Multifamily Sector Exposure: According to CPA firm MossAdams, the multifamily sector accounts for about 33% of the maturing loans from 2024 through 2026, including $190 billion this year.
• Debt Fund Involvement: Debt funds were instrumental in providing financing across various CRE sectors, including multifamily, especially during the peak value period between 2020-2022, when traditional lenders could not underwrite the loans or borrowers pushed the envelope for higher proceeds. Given their significant loan origination role then, debt funds are on the hook for a substantial portion of the maturing loans now.

There are several key factors driving the issue, including:

• Rising Interest Rates: Many apartment loans were issued at historically low rates (3% range) and are now coming due in a much higher interest rate environment (6% range). Owners who relied on floating-rate debt or short-term (3-5 year) financing are particularly vulnerable.
• Loan-to-Value (LTV) Challenges: Property values have declined due to higher cap rates and weaker or negative rent growth in some markets which are temporarily oversupplied. Lenders are requiring more equity now to refinance, which many owners do not have.
• Tighter Lending Standards: Banks, life insurance companies, and GSE lenders have become much more selective. Loan proceeds are lower, requiring equity injections or leading to foreclosures or pressure from lenders leading to property sales.

The market conditions create several implications for investors, including:

• Refinancing Challenges: Some borrowers will encounter difficulties refinancing maturing loans due to higher interest rates and stricter lending standards.
• Strategic Considerations: Investors should scrutinize the quality of underlying assets, market fundamentals and sponsor track records when evaluating potential investments in distressed CRE assets.
• Distress on the Horizon: Many syndicators and private owners who used high leverage or bridge loans may struggle to refinance their loans. Some properties may be forced into distress sales, loan workouts, or foreclosure.

Because debt funds are unregulated and mostly unreported, we can’t provide exact figures on the specific percentage of the looming maturities they comprise. But the percentage is significant. Don’t believe me that it’s coming? Let’s look at an example. (“The story you are about to see is true…the names have been changed to protect the innocent” – borrowing from a line from the ‘60s television show Dragnet).

Bountiful Capital, a mythical, Texas -based CRE syndicator that raises money from retail investors in $25,000 chunks, purchased the value-add, 100-unit, 1970s-built Oasis Garden Apartments in Phoenix in the fall of 2021 (the peak of the market). At the time, Net Operating Income (NOI) was $1 million. Bountiful bought the project at a 3% cap rate for $33,333,333. Their business plan was to renovate all the units and improve the common areas, increase the rents and NOI, and sell the property in about three years. As a direct result of their renovations, they expected to increase NOI from $1,000,000 to $1,400,000 and exit the property at a 3.5% cap rate, providing a tidy gross profit of over $6 million, about a 1.8x equity multiple and a 25% internal rate of return (IRR).

Because the cap rate was so low on their purchase, Bountiful would struggle to get more than 55-60% debt leverage from traditional lenders. And without that leverage, the IRR on their equity would have been very modest. So, what did they do?

They found a debt fund that provided 80% debt leverage to juice their returns. Instead of putting 50% down and getting a fixed rate loan in the 3% range, Bountiful took out a floating rate loan from an unregulated debt fund at 80% leverage for a three-year term. To hedge the risk of the floating rate, they purchased a rate cap to limit the number of increases that could occur on the loan. The cost of a two-year rate cap was about $50,000 at that time.

Shortly after their purchase, three seismic shifts occurred that upset the business plan for the folks at Bountiful Capital. First, they underestimated the impact of the flood of new supply that came to the market. Over 17,000 new units were delivered in Phoenix in 2023, over 21,000 new units came online in 2024 and Yardi expects approximately 26,000 units will be delivered in 2025. This new supply created significant downward pressure on rents. So instead of seeing 10% annual rent increases (30% rent increases over three years) that were forecast back in 2021, rents dropped.

Second, expenses rose higher than budgeted. Inflation was the culprit here, along with a dramatic increase in insurance rates caused by massive claims from floods, fires and other events that occurred around the country. Rising expenses directly hit NOI.

Third, interest rates rose dramatically and are expected to be higher for longer, notwithstanding the three rate reductions that the Fed implemented in 2024. Over time, those rate increases impacted capitalization rates, such that Bountiful’s 1980s vintage deal in Phoenix today would trade not at their underwritten 3.5% cap rate, but instead, a much higher 5.5% cap rate. (Higher cap rates equate to lower values.) In addition, Bountiful’s two-year interest rate cap came due in 2023. Since the new interest rate on the floating loan would be over 8%, they purchased an additional one-year cap for about $500,000, further impacting their returns.

So, let’s look at the math today. Say Bountiful completed some of their renovations (they had to stop at some point because as rents fell, renovations no longer made sense) and were able to increase NOI by 10%, to $1,100,000 (a portion of the increase was muted due to those higher expenses). What is the value today at the current market rate cap of 5.5%? $20 million! All their equity has been wiped out, along with about a third of the debt. Ouch!

Now, many of those borrowers like Bountiful and those debt fund lenders kicked the can down the road in 2024. After all, that’s only a loss on paper. You don’t realize the loss unless you sell. And in 2024, most were betting that interest rates were going down, which could drive cap rates back down and values back up. But that hope was fleeting.

Today, rates remain near recent highs. And very few are predicting that the Fed will cut rates further in 2025; in fact, some pundits are forecasting rate increases. Pity the guys at Bountiful who did not communicate these issues with their investors along the way.

In our hypothetical example, Bountiful could theoretically refinance their debt. But given today’s $20 million valuation, they would be limited to a loan in the $12 million range. So, they would have to stroke a check for more than double their original equity of $7 million to save the deal. Some institutional owners who can play the long game may do that but very few syndicators will. Most investors who put $25,000 in a deal are unlikely or unwilling to triple down on that type of investment.

This isn’t just hypothetical. In the last few months, we’ve seen several deals in Denver and Phoenix trade at levels where upwards of 40% of the capitalization stack (the equity and some of the debt) have been wiped out, mostly in 1970s vintage, value-add deals. Of course, the markets with the greatest amounts of new supply are hardest hit. There’s more of that coming in 2025 and 2026. Perhaps a lot more.

This was very much the prevailing sentiment at the national apartment conference that members of the Pathfinder team attended in Las Vegas in late January. Over the course of three days, we met with brokers, lenders, investors and service providers. In the ten markets we are active in, brokers indicated that deals would start to come to market this year in forced sale situations. It started with a trickle. We think that it grows; whether it grows to a raging river over time will remain to be seen.

For a deal junkie (and those with investable cash), the chickens have come home to roost. It’s time to saddle up and get ready. The next 18-24 months should provide some interesting investment opportunities.

Lorne Polger is Senior Managing Director of Pathfinder Partners. Prior to co-founding Pathfinder in 2006, Lorne was a partner with a leading San Diego law firm, where he headed the Real Estate, Land Use and Environmental Law group. He can be reached at lpolger@pathfinderfunds.com.