$3.04 Billion of Texas Floating-Rate Apartment Loans Run Below Breakeven

Trepp found 130 floating-rate agency apartment loans in Texas that are current on their payments even though the properties' reported cash flow doesn't cover them. They owe $3.04 billion at a weighted 0.77x debt service coverage, CRE Daily reported on Oct. 23.

That is 25.3% of the performing floating-rate balance in the state. These borrowers are still paying, so the shortfall is being covered by something other than rent.

Floating-rate loans are 21.3% of Texas agency apartment debt and 55.8% of the $1.35 billion that is delinquent. Their delinquency rate is 5.89%, compared with 1.26% for the state's other agency loans.

Texas has $150.10 billion of securitized apartment debt, second only to California. New York's floater delinquency is higher at 12.52%, on a smaller balance, and the typical delinquent Texas floater is $26.8 million, about 2.8 times the size of Florida's.

The 2021 and 2022 loans

Loans securitized in 2021 and 2022 hold 87.5% of the delinquent floating-rate balance. Their delinquency rate is 11.33%, against 1.35% for every other year.

Coupons are part of it. Texas floaters average 5.74%, fixed-rate loans average 4.66%, and the delinquent floaters pay 5.99%.

Ivan Barratt, who runs BAM Capital, wrote in a Multifamily Dive opinion piece on Oct. 9 that many 2021 and 2022 purchases used floating-rate bridge debt underwritten at 4% money and 6% rent growth.

These loans move with SOFR. Arbor's term sheet for Freddie Mac floating-rate loans prices off 30-day average SOFR, with cap coverage bought from an approved third-party provider.

SOFR went from 3.62% on Sept. 16 to 3.85% the next day, after the Federal Reserve voted 12 to 0 to raise its target range to 3-3/4 to 4 percent. The New York Fed published 3.90% for Oct. 22.

Weston Medical Center, 793 units

Trepp's Houston example is Weston Medical Center Apartments, a 793-unit property built in 1972 with $83.8 million outstanding. The loan went to special servicing in April.

Occupancy was 83% in July and coverage is 0.57x. The annualized debt yield of 4.4% is below the 6.40% coupon, so the property's income on the loan balance is smaller than the interest rate the loan carries.

The Kace in Grand Prairie, 720 units with $92.2 million outstanding, went to special servicing that same April. Its 2025 cash flow works out to a 4.4% debt yield against a 5.61% coupon.

Multifamily Dive’s distress tracker, citing CoStar, reported in May that S2 Capital's chief executive was paying off debt at 12 properties, including both The Kace and Weston Medical Center.

Houston CMBS loans outside the agency floater group have broken for other reasons. Waterford Grove, 550 units in Northwest Houston built in 1973, went to special servicing in February after Texas House Bill 21 took away the housing finance corporation tax exemption its loan required, Bisnow reported in March.

That loan was made in 2025. KBRA counted it among the loans that went back to 30 or more days delinquent in September, at $60 million, while Bisnow and Multifamily Dive put it at $62.5 million.

What it means for owners and investors

Refinancing into fixed-rate debt doesn't lower the payment for these owners. Northmarq’s Oct. 22 rate sheet priced a 10-year Freddie Mac loan at 55% leverage at 6.03% to 6.08%, above the 5.74% average floater coupon.

New floating-rate money costs about the same. The same sheet showed Freddie's 10-year ARM at 5.94% to 6.19% and Fannie Mae's structured ARM at 6.09% to 6.19%, with 30-day average SOFR at 3.89%.

That leaves new equity or a sale. Gabe Lerner of Lincoln Property Co. told Bisnow on Oct. 19 that he expects about half of the loans maturing each year to end up owned by lenders, because "the recycled capital isn't there."

The CRE Daily brief names the loans under 1.0x that are still paying as the likeliest next additions to the special servicing list. For a Houston buyer, those 1970s and 1980s properties carrying 2021 and 2022 floating debt are where motivated sellers are most likely to come from.

Prices for stabilized portfolios are holding near 6%. UDR said on Oct. 21 that its $2.0 billion venture with Apollo implies a cap rate of approximately 6.0%, and Commercial Observer reported the 7,059 homes average 39 years old.

Lender sales are picking up. Distressed apartment sales rose 62.8% in the first three quarters, according to Bisnow's read of MSCI data, and Yield PRO reported on Oct. 17 that Bridge Investment Group had foreclosed on the 1985 Wythe in Irving and the 1976 Archer in San Antonio.

Houston's job numbers have held up. The Dallas Fed counted job growth at a 2.1% annualized pace, about 18,000 jobs, from April through July, with unemployment at 4.9%.

Supply is thinning too. Philip Morgan of The Morgan Group said at the same Bisnow event, "We are clearly closer to the end of the supply than we were two years ago," and U.S. starts in buildings with five or more units ran at a 349,000 annual rate in September, down 25.9% from a year earlier, Multifamily Dive reported.

What to watch next

CRE Daily's brief says to watch the 2021 and 2022 floaters as they reach maturity and the end of their rate caps. MSCI estimates roughly 60% of 2021 and 2022 vintage loans mature in the second half of this year, Realty Today reported on Oct. 22.

UDR and Apollo expect to close on Oct. 29, the day after the Fed's decision.

Raisin’s Oct. 23 preview put the odds of a pause on Oct. 28 at 90.6% and the odds of a December hike at nearly 73%. A December move would take the range to 4.00% to 4.25%, a second increase this fall for the 130 Texas loans already paying out of short cash flow.