Experts say it’s a warning sign of pain to come, particularly for some aggressive investors who thought flipping apartment complexes would be easy money.
“There are folks who came in late to the game and were simply trying to flip a commodity,” said Ladson Haddow, managing partner at Atlanta-based real estate consulting firm Haddow & Co. “It worked until it didn’t.”
Subsidiaries of Mableton-based MSC Investment & Management LLC defaulted on loans that are backed by Celebration At Sandy Springs off Roswell Road and Virginia Highlands Apartment Homes along Virginia Avenue in Atlanta.
MSC acquired them respectively in December 2021 and March 2022 — right before the Fed started hiking interest rates, which it has since done so 11 times.
MSC partner Macky Pannu told Bisnow, which first reported the foreclosure listings last week, that his firm is working with its lender to come to an agreement to avoid an auction sale. MSC did not respond to requests for comment from The Atlanta Journal-Constitution.
While multiple prominent office buildings and hotels in Atlanta have recently gone through foreclosure, apartment complexes have yet to come under widespread duress. Occupancy rates and rents remain high, although they have regressed from historic increases in 2021.
Henry Lorber, a distressed real estate expert with Henry Lorber and Associates, said the rapid increase in interest rates could quickly upend the budgets of aggressive owners, while those with long-term strategies and deep pockets are more likely to endure.
“If you’re barely keeping your head above water right now... at some point your head sinks underwater,” Lorber said. “You cannot raise rents fast enough to deal with the doubling of your mortgage payment.”
Few places in the country can match Atlanta’s housing market explosion in recent years.
Atlanta home prices have increased nearly 69% since 2018, the most of any major market, according to Zillow. Fueled by a consistent stream of new residents and institutional investor interest, the high demand has made housing of all types, including apartments, a safe bet.
Rent prices across the Atlanta area increased 30% during the past five years, ranking only behind Phoenix, Miami and California’s Riverside region, according to ApartmentList.
MSC’s website boasts of quick flips and sizable profits.
The firm said it made an $8 million profit off a Peachtree Corners complex it sold just 18 months after buying it. MSC sold a Chamblee community and netted $8.7 million after holding it for about two years.
The firm bought Celebration, a 10-building property with 250 units, two years ago for $58 million. MSC paid $81 million last year to buy the nine-building, 270-unit Virginia Highland property. That was more than $20 million more than its prior owner paid in 2020.
Credit: Miguel Martinez
Credit: Miguel Martinez
Loans on both communities were for about three years with rates that were not fixed. The loans represented more than 70% of the purchase price. Haddow said long-term apartment holders typically borrow about 50% of the cost.
“(MSC) went out and they financed them with high leverage and short-term loans, and they overpaid for the properties,” he said.
Reaching a plateau
Rental increases peaked in 2021, when the average Atlanta tenant saw their monthly bill increase nearly 18% compared the prior year, according to data from CoStar.
But that historic pace was short-lived, with rents only growing 1.3% in 2022, signaling that the rental market was entering a correction period. The Atlanta region has also seen apartment occupancies dip, real estate services firm Berkadia reported in June.
The rent softness and occupancy declines are largely a result of new apartment communities being completed, bringing thousands of new units to the region, and increasing competition to fill them.
Haddow said stagnant or decreasing rental revenue combined with soaring interest rates is untenable.
“A lot of these groups bought these assets, underwriting very aggressive rent growth assumptions that frankly weren’t sustainable,” he said.
Refinancing loans has also become a challenge. A slowdown in apartment complex sales makes it difficult for banks and investors to evaluate their worth.
“There is very limited financing out there,” Lorber said. “Much in the same way that banks are being extraordinarily cautious right now, so are investors.”
Haddow said its unclear how many other apartment owners had similar business models. But he said it’s not “doom and gloom” for the apartment industry.
Still, Fed Chairman Jerome Powell said last week that more interest rate hikes may be needed to tame still-sticky inflation. Lorber said that’s a signal for real estate investors to batten down the hatches.
“I do not see stabilization for some time,” he said.