Why Multifamily Credit Markets Are Turning Risky

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This article is presented by Connect Invest.

U.S. commercial real estate is under mounting pressure as vacancy rates hit record highs—first in offices, and now creeping into multifamily and industrial properties. A decade of cheap capital and aggressive development has caught up to landlords facing slower rent growth, higher refinancing costs, and rising delinquencies across several sectors. Moreover, both commercial and residential real estate is undergoing profound changes as large metro areas cease to be automatically attractive as job destinations.

Why are multifamily markets turning risky, and what strategic changes can investors make to mitigate the risks and protect their margins?

Warning Signs for Commercial Real Estate

According to CBRE, total investment volume is still expected to rise roughly 10% this year to $437 billion, but much of that activity is concentrated in distressed sales and recapitalizations. Meanwhile, the Mortgage Bankers Association reports that delinquencies ticked up across lodging and industrial assets in Q1 2025, signaling stress that could spill into housing credit next.

The market segment that is most obviously ailing is the commercial office segment. According to a press release from Moody’s Analytics, the vacancy problem faced by the office real estate market is severe enough to signal a “structural disruption rather than a temporary downturn for the multitrillion-dollar sector.”

Office vacancy rates in major commercial hubs, notably San Francisco and NYC, have reached unprecedented levels (27.7% and 23%, respectively) as of the second quarter of 2025, according to recent Moody’s data. The pre-pandemic vacancy rate in San Francisco was just 8.6%.

The decline of office space vacancy is creating a tense situation for owners-investors and commercial building landlords. They are facing refinancing problems with lenders, who are increasingly viewing this type of investment as risky. This problem is exacerbated by the fact that many lenders of commercial space loans are smaller regional banks, which are even more likely to make these lines of credit more expensive in order to protect themselves from increasing default activity.

Adaptive reuse, aka apartment conversions, may solve part of the problem, with some success stories. However, this too is risky, since converting office spaces into apartments is fraught with structural and legal challenges.

Multifamily Markets in Trouble

The most obvious answer for investors considering pivoting away from office space is multifamily real estate. But is investing in apartment new builds as safe a bet as it once was?

There are indicators that the multifamily market—long considered the safest corner of real estate—now faces its own headwinds. A wave of new apartment supply, softening rent growth, and stubbornly high interest rates have compressed margins for developers and owners alike. For lenders and investors, that means reevaluating credit exposure and shortening duration risk.

After nearly a decade of rent growth turbocharged by the surge in demand during the pandemic, the multifamily market is stagnating, with growth of just 0.2% recorded this year, according to RealPage numbers. The multifamily building frenzy in response to unprecedented demand for housing in popular relocation areas like the Sunbelt has finally caught up with this segment of the market.

The situation is unlikely to improve in 2026 and beyond; with interest rate decreases to below-6% levels on the horizon, many renters will inevitably become homeowners in the coming years.

These are normal market fluctuations that inevitably result from supply-and-demand imbalances and economic ups and downs. However, what investors must understand going forward is that there are larger shifts at play here—they are societal, not merely economic, and likely to be permanent.

The fates of the office market and multifamily segments are profoundly interlinked. Both are suffering from a historic shift in how Americans work, and what is happening to urban areas as a result.

A substantial majority of people are no longer prepared to simply rent an apartment close to where their office is; they no longer have to. Renters actively choosing multifamily developments are now likely doing so for other reasons, like great amenities or a walkable and exciting downtown area, where they can enjoy life outside work.

Refining Your Portfolio Is Key

A multifamily investor’s biggest concern is no longer so much falling rents as uncertainty about long-term occupancy prospects.

The most obvious solution here is refining one’s portfolio-building strategy and shortening debt duration whenever possible. What does refining mean here?

Connect Invest

This is exactly where Connect Invest’s Short Notes come in. By funding diversified, short-term real estate debt investments, investors can earn fixed, high-yield interest while limiting exposure to long-horizon vacancy and rent risk. Connect Invest’s underwriting process actively stress-tests each project against occupancy and income fluctuations—so even if vacancies rise or rents fall, investor returns remain stable.

Instead of worrying about the next vacancy report, investors can keep their capital moving—and their returns steady—with Connect Invest’s data-driven approach to short-term real estate credit.

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