Detroit, Chicago and Denver have the highest risk scores among the top 25 metro areas for maturing multifamily loans, Kroll Bond Rating Agency (KBRA) said in a new report. KBRA weighed apartment supply and demand metrics from several sources to derive a risk scale between 1 and 25 for each metric, with one being the most favorable and 25 the worst. 

“In 2024 and 2025, 8.6% of multifamily’s principal balance for the largest 25 MSAs is scheduled to mature ($15.9 billion),” KBTA reported. However, “the percentage of loans maturing in the period can vary meaningfully by MSA. Maturing loans in MSAs with high risk scores could face greater refinancing challenges relative to those with lower scores.” 

For each of the three highest-risk metro areas, low employment growth was a factor, KBRA reported. Detroit and Chicago also exhibited negative population growth along with a relatively higher Home Ownership Affordability Monitor (HOAM) Index, as measured by the Federal Reserve Bank of Atlanta. Denver’s high risk score stemmed mainly from supply issues, while its vacancy rate (8.8%) and percentage of inventory under construction (11.3%) are both higher than the national average. 

At the other end of the spectrum was Las Vegas, which had the lowest risk score, albeit only one-third better than the next two lowest—Houston and San Diego, which had the same score (48).  

Las Vegas benefited mainly from its demand metrics, including current and forecast strong employment and population growth, as well as a favorable HOAM ranking. Houston also benefited from positive employment and population growth, while San Diego, meanwhile, had more positive supply metrics. 

As rent growth declines and new construction progresses, oversupply is a hot topic in the multifamily industry. Now, fresh data shows the impact of elevated supply could fall heaviest on the high-end properties that make up the bulk of scheduled new deliveries.

There were just fewer than a million units under construction at the end of the third quarter, and 70% of those were considered high-end, according to a CoStar report that found the gap between mid-range and high-end rents is widening.

The rent difference between properties considered four- or five-star and those considered three-star is about $550 per month, or $6,600 a year, much higher than the marginal difference in years past, CoStar found. That could be an issue since developers often deal with oversupply by offering concessions to lure tenants from other complexes, making larger differences more impactful.

High-class building rents nationally average $2,074 per month, so a developer would have to offer at least three free months to attract a tenant from a lower-class building, CoStar reported.

Landlords are already offering concessions on 30% of rental listings, the highest rate in two years, according to a Zillow report from last week. 

The trend is being felt in submarkets like Downtown Miami, which saw luxury rents drop 1.1% at the end of the third quarter, while lower-tier rents grew by 1.1%, according to CoStar. Downtown Miami has about 16,708 units under construction, or about 57.8% of its inventory. With an average price differential of $540 a month, Miami’s nonluxury product is somewhat insulated from the large supply of four- and five-star units coming online, CoStar reported.

Charlotte’s South End had 6,592 units, or 59.3% of its inventory, under construction and saw a rent growth decline of 3.1% in the third quarter. 

Other submarkets likely to feel a pinch include St. Augustine, Florida, Downtown Austin and Downtown Atlanta, which all have a construction pipeline representing more than 40% of their inventory. All three markets saw rent growth declines in the third quarter.

The Sun Belt has the largest concentration of units under construction. The markets with the most units being built include Downtown Miami, Downtown Nashville, Frisco/Prosper in Dallas-Fort Worth, Downtown Denver and Charlotte’s South End. 

Multifamily REITs are seeing the impact of oversupply and concessions in these areas, according to third-quarter earnings calls. UDR reported its San Francisco and Sun Belt markets being impacted by new supply, with average concessions hovering at about three weeks and ranging up to six weeks free. 

UDR expects the concession-heavy dynamic to continue throughout the fourth quarter and into 2024, said Michael Lacy, the company’s senior vice president of property operations.

The same submarkets seeing many product deliveries this year will probably see more still in 2024, Camden Property Trust President Keith Oden said.