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MultifamilyMarket CommentaryUnderwriting

Apartment Absorption Beat Deliveries for the First Time in Five Years

CREagentic TeamSeptember 30, 20265 min read

This week's report

The National Association of Realtors' September commercial market report describes a stable market carrying elevated borrowing costs. The office section repeats what the year has shown: gradual stabilization, positive annual absorption, all of it concentrated in Class A, with Class B under pressure despite inventory removal and Class C still losing tenants. The multifamily section has the news. Steady demand met a sharper slowdown in new supply in July, and absorption exceeded deliveries for the first time in nearly five years.

Why this matters more than it sounds

Since 2022 the apartment market has delivered more units than it leased, in most Sun Belt metros by a wide margin. Rents went flat or fell, concessions went to two months free, and the value-add business plans financed in 2021 stopped working. Every problem in multifamily credit this year traces to that gap between supply and demand.

The gap has now closed. Starts fell by half in 2024 and 2025 because nobody could finance a new deal at 7% construction debt, and the buildings that were started in 2022 have mostly delivered. Demand did not change much. Supply did. From here, occupancy rises and concessions burn off, slowly, market by market, starting in the metros that overbuilt least.

What it means for the loans

The multifamily loans in special servicing this year are there because NOI did not grow into the debt. This report is the first sign that NOI growth is coming back. It will not arrive in time for a loan maturing in the fourth quarter of 2026. It may arrive in time for a loan maturing in late 2027, if the sponsor can get a 12-month extension and the property is in a market where concessions are already tightening.

That makes the extension conversation worth having on different terms than in the spring. In April a servicer looked at a Texas garden apartment loan and saw flat rents for two more years. In October the same servicer can look at a submarket where deliveries fell 60% and absorption is positive, and see a path to a refinancing in 2028. Bring the submarket supply data to the meeting. It is the best argument a multifamily borrower has had in three years.

What it means for buyers

The distress in apartments is real and the recovery in fundamentals is early. That combination is the one buyers want: forced sellers and improving operations. Underwrite in-place rents with concessions burning off over 24 months rather than 12, use the current debt cost with the September hike in it, and pay for the building rather than for the recovery. If the report is right, the recovery comes free.

And office, once more

The office paragraph in the NAR report could have been written in any month this year. Class A recovers, Class B struggles, Class C loses tenants. The apartment turn took four years from the peak of the supply wave. Office has no supply wave to burn off. It has a demand problem in two of its three tiers, and the report offers no reason to think that changes in 2027.

Bring the submarket data and a clean rent roll to the meeting

The extension argument this fall rests on two things the borrower has to produce: evidence that deliveries in the submarket have fallen and absorption has turned, and a rent roll the servicer can trust. The first is research. The second is reconciliation. Both used to take weeks and now take days.

Market research tools pull permit data, delivery schedules and absorption figures for a submarket into a two-page memo in an afternoon. Rent roll reconciliation compares every unit's lease to the property management system and lists the differences, which for a 300-unit property is usually a few dozen lines and a few thousand dollars a month of NOI in one direction or the other. Fix the rent roll, attach the memo, and the servicer has an argument written in its own language. The borrower who spends the extension period on this work walks into the 2028 refinancing with a property that has grown into its debt. The one who waits for the market to do it alone finds the market was a year late.

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