In a sign that a default cycle may have initiated, a Texas-based apartment syndicator is facing the loss of two multi-family properties in Austin after defaulting on a substantial $125 million loan. This comes on the heels of the same firm defaulting on $288 million in loans tied to properties in Houston. The Real Deal attributes the surge in apartment foreclosures across Texas and the Sun Belt to a combination of factors, notably the Federal Reserve’s decision to raise rates, resulting in skyrocketing debt payments for property owners who relied on floating-rate debt amid slowing rent growth.
As this default unfolds, economists at Apollo Management underscore the broader implications, highlighting a growing trend in loan and high-yield bond defaults. They identify the Fed’s interest rate hikes as a primary driver, stating that the central bank’s attempt to slow down the economy is directly contributing to the emergence of a default cycle. The credit market is now facing ominous signs, with higher debt costs adversely affecting US companies. With the Fed keeping rates higher for an extended period, the economists predict that higher debt costs will continue to impact earnings and interest coverage ratios, leading to a rise in default rates, particularly among middle-market companies. The situation underscores how borrowing has become increasingly expensive, pushing more firms toward the brink of default.
Sources:
A Texas based apartment syndicator is set to lose 2 multi-family properties in Austin following a $125 million default
The same firm recently defaulted on $288 million in loans tied to properties in Houston
Here's the reason for the recent spike in apartment foreclosures in… pic.twitter.com/5uyO1qKiSj
— Triple Net Investor (@TripleNetInvest) December 8, 2023
2. A Default Cycle Has Started (via @KobeissiLetter) pic.twitter.com/bMXxcWhhGX
— Smartkarma (@smartkarma) December 5, 2023
- A default cycle has started, spurred by high rates and debt costs, economists at Apollo Management said.
- Data on default rates and bankruptcy filings show just how severe the situation is.
- “It is the direct consequence of Fed hikes. The Fed is trying to slow the economy down.”