Multifamily investment capital is surging, but the sector faces mounting challenges as delinquencies climb to their highest levels in years, according to industry experts who spoke at a recent Mortgage Bankers Association roundtable.
Chad Musgrove, senior vice president at M&T Realty Capital Corp., reported that his firm has witnessed increased levels of capital flowing into multifamily investments. This influx has driven interest rate spreads tighter, with current spreads falling into the 200-to-250 basis point range for deals with 65% to 70% leverage, according to Musgrove. Higher leverage transactions see spreads climb to at least 275 to 325 basis points. The trend is expected to continue into 2026 as short-term rates are anticipated to decline.
Investor appetite remains the strongest for newer properties where borrowers seek lease-up loans to replace construction financing, Musgrove noted. Value-add bridge financing also attracts interest, but only for projects with experienced operators who can minimize risk during improvement phases. Most lenders are competing to win deals led by proven sponsors with established track records and significant equity stakes in transactions, according to Musgrove.
However, the sector confronts significant credit challenges. Robert Grenda, managing director at KBRA, pointed out that delinquency and distress among non-agency commercial mortgage-backed securities multifamily loans have reached higher-than-expected levels. According to data from Trepp that Grenda cited, the delinquency rate jumped from 3.33% in September 2024 to 6.59% currently. KBRA's own data shows the multifamily distress rate, which includes loans at least 30 days delinquent plus current loans that are specially serviced, reached 9.87% in September, with only office and mixed-use properties showing higher rates.
The elevated distress stems from historically high levels of new supply coupled with lower net absorption and rising expenses, which have flattened rent growth, according to the panelists. Net absorption of apartment units peaked in the third quarter of 2021 before beginning to decline. New supply has increased dramatically from 45,000 units in 2011 to 305,000 units in 2024. Net absorption in the first quarter of 2024 was 2.5 times larger than in the first quarter of 2025, highlighting the sector's softening demand.
Malay Bansal, managing partner and head of trading & capital markets at 3650 Capital, identified notable changes in multifamily loans within conduit deals. The portion of multifamily loans in conduit transactions has surged from 15% and 9% in 2022 and 2023, respectively, to 27% by the end of the first nine months of 2025, according to Bansal. This increase reflects growing investor preference for multifamily loans driven by improving sector fundamentals, with occupancy rates bottoming out at 92%.
Despite these positive trends, delinquencies continue rising, driven primarily by older, rent-regulated buildings that show disproportionate distress as expenses have increased more than rents, according to the MBA discussion.
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