January 2025 Insights: Distress, Opportunity, and What’s Ahead in 2025
NMHC Takeaways: A Challenging Market
At NMHC, the industry’s largest annual conference, we engaged with sales brokers, debt brokers, equity groups, lenders, and operators. If we had to sum up the sentiment in one word, it would be challenging.
The primary issue? Interest rates. Many expected the Fed finally cutting rates in September 2024 would drive borrowing cost lower, yet the 10-year Treasury has since increased roughly 100 bps and remains elevated at 4.5%-4.8%. The industry consensus has shifted to the expectation that rates will remain high throughout 2025. Sales brokers echoed a common refrain: “We’re doing a ton of BOVs (Broker Opinions of Value), and half of the deals are valued at the loan balance.” Rising rates continue to suppress property values, leaving distressed and undercapitalized operators unable to refinance or inject additional equity.
Lenders, recognizing the shifting landscape, have begun to take action—through forced sales, foreclosures, and operator replacements in struggling deals. However, real estate is a slow-moving asset class, and these processes take time. We expect this activity to pick up in the second half of the year, aligning with the expiration of loan extensions. In the meantime, we remain patient and highly selective, staying disciplined in our investment approach as opportunities unfold.
Outstanding Distress: Delayed but Inevitable
For months, we—along with much of the industry—anticipated a surge in distressed sales in 2024. One of the primary reasons for this was because there was over $600b of multifamily assets purchased at peak valuations in 2021-2022, much of which was executed with short-term floating-rate debt. However, that wave has been slower to materialize than expected. To understand why, we must examine how these loans were structured.
Floating-rate bridge loans are typically structured with a three-year term and two one-year extension options. In theory, borrowers must meet loan covenants to qualify for these extension options. What we saw in 2024 was a willingness from lenders to grant extensions to borrowers who were NOT compliant with their loans. Why didn’t lenders simply call these loans when operators fell below their required debt service coverage ratios and move on? It’s complicated. Many lenders originated billions in loans during this period, sharing the same unwavering confidence as today’s distressed operators, that the market’s rapid growth would persist. Instead, as we now know, that optimism was misplaced. It has been in lenders best interest to not realize losses and try to get these loans to perform. Given the 20-40% valuation decline since peak 2021-2022 levels, this has proven to be challenging to say the least, as operators have battled with elevated interest rates, operating expense inflation, and stagnating rent growth. The leniency shown in 2024 by lenders extending loan maturities served as a temporary lifeline for struggling operators, but 2025 presents a different reality. Patience among lenders is wearing thin, and we believe distress and capitulation have already begun.
Market Insights: The Path to Distress in 2025
Data is a key pillar our investment strategy, and we want to share some internal analysis on the potential for distress in 2025. The graph below aggregates all floating rate loans in our target markets that were originated between 2020 and 2022 and remain outstanding.
Most loans from 2020 and 2021 have likely exhausted all available extension options, requiring full repayment of the loan this year. The Sunbelt states lead in outstanding loan volume, having experienced the sharpest price appreciation from 2019-2022 followed by a significant pullback over the last three years. As a result, many assets will sell below the seller’s original purchase price—and in some cases, even below the loan balance. While this is a challenging reality for many owners it creates a compelling buying opportunity over the next 12-24 months to acquire assets at attractive pricing. Though these markets have faced headwinds, their fundamentals, demographic trends, and long-term investment outlook remain strong, and we look to capitalize on them.
What We Do
We are strategic real estate investors.
At Vanamor, we combine an institutional approach with an often overlooked middle-market focus to employ a flexible and disciplined investment philosophy. Our goal is to provide stable cashflow with above-market total returns. Since inception, Vanamor has averaged a greater than 33% annual return with an average of 8% annual cashflow distribution.
