Higher Rates Are Testing the Capital Structures Beneath Well-Performing Multifamily Buildings

The multifamily market is facing an unusual kind of pressure. Many of the properties under strain are performing well as buildings. They are well kept, well leased, and in demand. The challenge lies in the financing underneath them, much of it structured for a rate environment that has not returned and may not return soon.

Steven Libman, founder of Investing With Purpose™, sees this pattern across the market. With the Federal Reserve signaling that rates may stay elevated for some time, he argues that underwriting discipline has become the defining factor in how assets move through this part of the cycle.

Strong Buildings, Strained Structures

Libman points to properties with strong occupancy and solid physical condition where the debt no longer fits the current environment. Short-term floating-rate loans taken out when borrowing costs were low have reset at higher levels, narrowing the gap between cash flow and debt service.

“Higher rates aren’t the enemy of real estate,” he says. “They are a test of structure. A sound asset with the right financing is built to hold up across a range of rate environments.”

That distinction shapes how the coming adjustment is likely to unfold. Libman expects an increase in loan modifications, workouts, and special servicing as lenders and borrowers work through maturing debt. Many lenders extended loans in recent years in anticipation of rate cuts, and as that expectation shifts, both sides are moving toward longer-term resolutions.

Underwriting for Today’s Environment

The discipline Libman emphasizes most is underwriting to current conditions rather than expected ones. Projections that depend on falling rates introduce a variable no operator controls.

“It’s natural to hope for rate cuts, but hope isn’t an underwriting assumption,” he says. “We aim to underwrite as if money stays expensive, and we stress test for rates moving higher, not just lower.”

The principle is straightforward: a deal should stand on the cash flow it produces today. “A deal needs to work on today’s cash flow, not on projections,” says Libman.

He also offers historical perspective. Mortgage rates in the early 1980s were far higher than they are today, and real estate continued to function as an asset class. In his view, the current environment calls for recalibration rather than alarm.

Revisiting the Exit

A second consideration sits at the end of the hold period. Many properties acquired in recent years were underwritten to sell at low capitalization rates. As interest rates rise, cap rates tend to expand, which can lower property values even when net operating income holds steady.

Libman encourages operators to revisit exit assumptions regularly and to model them against current market cap rates rather than those that prevailed at acquisition. Doing so gives investors a more realistic picture of the path ahead and supports better decisions about timing and hold strategy.

Working With Lenders

Lenders typically provide the majority of the capital in a real estate transaction, which makes them central partners when a loan approaches maturity.

“Lenders are the largest capital partner in most deals,” says Libman. “Early, proactive conversations with them are one of the most important things an operator can do in this environment.”

When lenders do take properties back, they generally look to experienced operators to stabilize and reposition those assets. Libman sees a role for well-capitalized operators in that process, approached with the same discipline as any acquisition: strengthen the existing portfolio first, then evaluate new opportunities conservatively.

What Durability Looks Like

Libman points to a consistent profile among operators positioned to navigate this cycle: long-term fixed-rate debt, conservative structures, meaningful reserves, and consistent communication with investors.

“Transparency matters most when the conversations are difficult,” he says. “That is when trust is built.”

As maturing debt works its way through the market over the coming quarters, the operators who built for durability rather than for a single rate outcome are likely to define the next phase of multifamily ownership.

About Investing With Purpose: Investing With Purpose is a faith-driven multifamily real estate firm based in Bluffton, SC. iwpurpose.com.

Educational Purpose Only. This post is intended solely for informational and educational purposes. It does not constitute investment, tax, or legal advice, nor is it a recommendation or offer to buy or sell any security or investment. Always consult with your qualified tax advisor, legal counsel, and financial professional before making any tax-related or investment decisions, especially those involving retirement accounts or private placement investments.