Top of Mind: $44 Billion Funding Gap in Multifamily & Opportunities - Aspen Funds
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Top of Mind: $44 Billion Funding Gap in Multifamily & Opportunities


What’s causing the Multifamily Funding Gap, and how can you navigate it? Join us to understand the impact of property value fluctuations and the steps needed to close the financial divide in the world of multifamily real estate.

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Ben Fraser: Welcome back to the Invest Like a Billionaire Podcast. I am your co host, Ben Fraser, joined by fellow co host, Bob Fraser. We’ve got a top of mind episode for you today. These are shorter episodes focused on interesting topics that are trending in the economy, in the news, and things that we think are relevant for our listeners.

And today we’ve been reading a lot and this is something that we’ve been paying attention to for some time and it’s the funding gap of new deals and existing deals. As it’s hitting multifamily pretty acutely here. Bob, what does that mean? What’s the funding gap? 

Bob Fraser: Okay. So the funding gap is when investors who own, let’s say multifamily apartment complexes, it’s time to refinance that deal.

And it won’t qualify for an existing refinance because of the values. So typically, Banks like to loan, 65 percent of the value, you’ve got to have 35 percent equity. But if the values drop when you refinance, so the value of imagine, the apartment goes down in value by 10%.

Then you have to add equity. You have to bring new equity in order for them to finance a lower amount loan. 

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Bob Fraser: Let’s say it was, just for rough numbers as a 30 million apartment complex and you have a 20 million debt on that, but now it’s the 30 million apartment complex that drops by 5 million in value just for an FYI.

You’ve got to bring, you’ve got to bring now, so they’re only going to loan, two thirds of the 25 million value. So you’ve got to bring the difference. And so that’s a funding gap. So the big news is that while there’s been a funding gap in office buildings, which everybody knows, offices have seen roughly a 50 percent decline in values and a lot of people are hurting there and multifamily.

We have been warning about it for over a year now, multifamily is now seeing the same thing. So they’re saying, according to CBRE, which is a big commercial brokerage firm, that there’s now a 21 billion funding gap in multifamily right now, so again, points to distress in the multifamily space.

So a lot of these guys, these apartment guys, they’re watching their maturities when the maturity date is coming. Thank you. Like a cliff, right? They’re on a train, and the train is just moving because the train is called time, right? And it’s just moving. And at some point their loans mature and they’re looking, okay, I’ve got X more days until my loan matures.

And they’re trying to figure out what they’re going to do to either go back to investors and raise more money or bring money out of their pocket or try to sell it or something. And there’s not enough cash. So these guys are just cash poor. So we personally know dozens of investors that are exactly in this situation, right?

Friends of ours that have that are like, what am I going to do? And right now they’re just like, biding their time going to do it. That’s all good guys. Don’t worry. But the truth is. They know that the deadline approaches and has to stop at some point. 

Ben Fraser: Yeah, it’s the same article the receiver is saying, even though loans that are maturing through 2026, the funding gap is closer to 45 billion.

And so it’s going to more than double over the next few years. And so we already have this issue right now, and it’s only going to get worse. Bigger is as a lot of these loans are coming due and we were talking just offline a minute ago. We’re talking, we have a lot of banker relationships because we do a lot of deals and, I used to be a banker, a commercial banker and have a lot of connections in that space.

And this is exactly what they’re all saying. It’s like a perfect storm in a lot of ways, because, We have interest rates that have skyrocketed, right? And so it puts a lot of pressure on borrowing costs. And meanwhile, eyes are being massively compressed because you’ve got operational costs that are skyrocketing, 

Bob Fraser: And just to review and analyze is net operating income. That’s how much an apartment complex earns After expenses, so you take your rents in that’s your income You deduct your expenses your cost and that’s your net operating income. Exactly Yeah, and so it’s and it’s going down because expenses are rising because of inflation is rising.

Ben Fraser: So I was literally talking with a banker yesterday.

He said case in point, we got a property, a good property, good borrower. They got an insurance basically new quote for this next year. That is double what they were paying before property insurance, 

So it’s a 50, 000 hit to their bottom line. If you understand, values of apartments and commercial real estate in a lie is the golden number for valuations.

And so a 50, 000 hit to net operating income is, what’s that at a 55 cap rate? That’s a massive value. We did a quick calculation here because I’m on the fly here, one of five, that’s a million dollar hit value, just from that one item. 

Bob Fraser: So if your NOI goes down, the way commercial properties are priced is a multiple of NOI and the multiple is the cap rate.

 If you, if your income drops, that property’s value drops, if it goes up, the property’s value goes up. Yeah, so that’s, this is an issue, and across the space and, and let me just say, so if somebody’s going to hear this and say, okay, the sky is falling, and they’re already saying this, banks are going to collapse and it’s 2008 all over.

It never fails. I’ve been through. I don’t know how many cycles and everyone is predicting the previous cycle repeating itself? Everybody. Right? And the one thing that’s for sure not going to happen is the last cycle repeats itself. Whatever the last crisis was is not going to be the next one.

That’s the first. Sure. Because everybody’s on guard against that one. And it’s the one before that, or before that. So this one is definitely not a great financial crisis. And the reason why is, for one, there is a housing shortage in the United States. And so we need these apartment complexes, and they’re going to be great investments. It’s not a good time right now.

The other thing is that there may be a couple banks that get in trouble regional banks because they’re over concentrated, but it’s going to be small and they’ll be, they’ll be bought up and the real reason is there’s, hundreds of billions of dollars in capital sitting on the sideline, waiting to scoop up these assets, right?

And, good fire sale price. So it’s just not going to be in effect. I doubt it’ll even hit main street. Yeah. It’s going to be a tempest in a teapot, but a great opportunity. And speaking of opportunity, what is on our brains at Aspen where we think this is a good thing? 

Ben Fraser: It plays into our themes, right?

We’re looking first at the macro. Picture where what’s happening and where are the opportunities that are being created. And right now, it’s this kind of tale of 2, themes of we’re having some short term stress and especially multifamily right where you have. Increasing operating costs with a massive amount of supply coming over the next 24 months, right?

A record level of new products being delivered. 

Bob Fraser: New apartments that are finishing being delivered to the market. 

Ben Fraser: Yeah, at the time when it’s, the stress on the market. And meanwhile, borrowing costs are putting pressure on cap rates. And banks are pulling back their leverage. They don’t, they’re going, risk we do not want to. A lot of banks aren’t putting out new money at all.

A lot of banks if they are putting out new money are massively decreasing leverage points and then all these maturities that were on short term notes are hitting so what we’re seeing is There’s a lot of good properties, located, with good business plans that are, halfway through, but they’re running out of interest reserves, they are, they have an interest rate cap that’s expiring, meaning they have to buy a new, cap on their interest rate to extend for a little bit longer, they don’t have the cash to do that or, the point you made earlier, they’re short on refinancing, so the values have gone down in the short term, But long term, if you believe our themes of we have a housing shortage, we’ve talked about this in other episodes, long term housing is one of the best ways to ride the inflation reality, right?

It’s one of the most tightly correlated asset classes to inflation from our research historically. And so if you believe that long term thesis. This is a great way to come in. So we are putting together a fund that’s going to be gap funding. A lot of these deals are good deals in good locations with good operators, but they’re just short for a variety of reasons.

And then this gap they need filled and you can come in at a preferred position and these deals, because they have no other option, right? Banks aren’t lending anymore. Their investors don’t want to do capital calls. And it’s generally not a huge sum of money that’s needed to bridge this gap and you come in at a preferred position. 

Bob Fraser: You get actually incredibly high rates of return basically they’re desperate and there’s this funding gap where there’s no money available so if you come in with even one or two million dollars on a 60 million property, that’s all they need.

And we can actually step way into the, down in the capital stack. Where we get a preferred position and extremely safe position because we’re way low in the capital stack and. Yet get super high returns. And so we’re seeing an incredible opportunity, and people think, Oh, it’s going to be so risky.

You look at a distressed debt fund or something or, or strategic credit fund, something like that, but it’s going to be but it’s not okay. So even with the great financial crisis, all these homes that the values blew up, how many homes vaporized, how many actual physical homes disappeared?

They don’t. And same with the apartment company. They don’t disappear. You can have perfectly beautiful, wonderful properties that don’t disappear. What happens, it’s a capital wipeout. And how many lenders lost their shirts? They don’t, right? In this kind of space, if you’re at 65 percent loan to value ratio, you’re a bank owning the first lien, they’re not going to lose.

They’re not going to lose in these deals. And so that’s where you can just make outsized returns. And so we’re pretty excited about, of course, Aspen is where we’re experts in distress and have been in it for 10 years. So it’s right up our alley. So incredible opportunities, guys, there’s no such thing as bad news, right?

There’s this every 2 sides of the same coin, right? Every bad news is someone else’s good news. And we just there’s every crisis as an opportunity, right? So we think this is an incredible opportunity. 

Ben Fraser: Yeah. And we’ll be talking more about this over the coming months. Some of them we talked about for a while.

And be sure if you want to learn more about this as we cover specific details on this new focus of ours, be sure to join our investor club. You can go to and be sure to jump on that.

Thank you. And get notified as we come up with some of these new ideas and things for investors. So with that, hope you enjoyed this episode and if you’re enjoying this, please do leave us a review, share it with a friend. We always appreciate that and tune in next time.


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