Lynn Nathe grew tired of the meagre gains from her family’s retirement account. In late 2021, she invested US$200,000 ($270,413) with a company making 30% returns by buying the hottest ticket in global real estate: US apartments. Now, she says, most of that money is gone.
The loss is a personal calamity for Nathe, a business school graduate who invested earnings from her husband’s dentistry practice in Yakima, Washington. Yet the story of her ill-timed bet — and the collision of social-media investing, Wall Street’s securitisation machine and sharply higher interest rates — also shows how Fomo and easy money once again combined to burst an American real estate bubble.
A significant portion of concern regarding US commercial property has focused on the office market, where more than US$38 billion in buildings were in distress as of March, compared with about US$10 billion for apartments, according to MSCI. However, the firm’s data show that multifamily buildings make up the biggest share of properties with potential distress — exceeding even offices — with more than US$56 billion worth of real estate at risk of financial trouble.
Unlike office buildings, largely backed by major financial institutions, much of the unravelling is centred on personal investors. Apartments were supposed to be an ironclad investment, protected on the downside by the basic hierarchy of human needs, with potentially outsized returns as the country’s persistent housing shortage sends rents ever higher.
However, financial firms searched for ways to earn greater returns by taking bigger risks. Upstart landlords like Western Wealth Capital, in which Nathe invested her money, specialised in speculative fix-and-flip deals, levering up with loans that were often then packaged as securities and sold to institutional buyers.
It echoes the subprime mortgage boom that led to the 2008 financial crisis: a lending model built on packaging seemingly safe loans for borrowers with short track records and small down payments. When interest rates started spiking two years ago, values tanked, creating worlds of trouble for landlords, debt funds and people like Nathe. She and four other investors who spoke with Bloomberg News said they have lost money in Western Wealth deals.
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“When you’re at a casino, you know what you’re doing is gambling,” said Aleksey Chernobelskiy, whose firm, Centrio Capital Partners, runs a service helping retail investors salvage their investments in multifamily deals. “Here, people were gambling, but they didn’t know it.”
Western Wealth CEO Janet LePage, in an emailed response to questions, said the company was comprehensive with disclosures and that she prioritises transparency and regular communications with investors. She said many firms, including hers, failed to anticipate the speed and magnitude of interest rate increases.
The troubles in commercial real estate are now only deepening as high interest rates persist, and loans come due. Some big landlords are trying to stave off asset sales: Barry Sternlicht’s Starwood Real Estate Income Trust, a vehicle for personal investors, last month tightened limits on shareholders’ ability to pull money to preserve liquidity and hold off on having to unload property in a falling market.
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However, apartment owners like Western Wealth sometimes need to sell buildings at steep losses to pay debt or escape a cash crunch. Their turmoil extends to the far corners of Wall Street, where the US$80 billion market for commercial real estate collateralised loan obligations — the investment vehicles for the bundled loans — is facing unprecedented strain. Distress in CRE CLOs reached a record 8.6% in April, according to data provider CRED iQ, and the creation of new CLOs is roughly 90% lower this year than in 2022.
Pandemic boomtimes
Nathe shifted her retirement strategy during the Covid-19 pandemic when it seemed like everyone was getting rich. Her family had lived well on her husband’s earnings as a dentist, but after putting four kids through medical school, their 401(k) wasn’t cutting it.
The apartment industry was on a wild ride at the time as investors sought to take advantage of rock-bottom interest rates and soaring rents. In the fourth quarter of 2021, a record US$166 billion worth of US apartment buildings changed hands, more than three times the pre-pandemic norm. Traditional players led the way, from private equity giant Blackstone to insurer Guardian Life and Canadian pension fund Caisse de Dépôt et Placement du Québec.
But for many apartments, the highest bids came from companies virtually no one had heard of — real estate syndicators. They pool money from affluent individuals to buy properties, enabling investors to benefit from rising values and rents without dealing with the headaches of renovations and financing.
Nathe was pulled in as crowd-sourced investments played a larger role in the financial landscape. At a time, meme-stock buyers were banding together to topple hedge funds, and crypto bros were sending Bitcoin to the moon; everyday investors were also targeting real estate, leveraging technology to build empires of Airbnb vacation homes, self-storage facilities and most of all, apartments.
Nathe started following a wealth influencer named Mir Jafer Ali Joffrey, who went by the nickname “Buck.” He had an earlier career as a cosmetic surgeon with a Chicago-area clinic that offered liposuction and Brazilian butt lifts. After striking wealth with real estate, he turned to full-time investing about a decade ago.
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Joffrey hosted a podcast called Wealth Formula, dedicated to personal finance and helping people invest their way to an easier life. One guest was LePage, a former project manager for telecom and utility companies who began flipping houses in Phoenix after the financial crisis. She parlayed that into a business and formed Western Wealth Capital with David Steele in 2014. The company turned into a success; LePage, in an email to Bloomberg, said the firm had average annualised returns of more than 30% from 2014 to 2022.
In one of Joffrey’s podcasts, LePage said that the Vancouver-based company focused on markets with growing populations and strong job growth, like Arizona and Texas. But the real magic came after the acquisition, when Western Wealth ran through a checklist with 84 improvements, from installing new appliances to planting flowers. The idea was to make renovations that allowed the company to boost rents and then sell the property at a healthy profit.
The concept of value-add investing fit nicely into the “infinite returns model” that Joffrey boiled down for members of his investor club as a “mathematical” formula for success: “Wealth=Leverage (Mass x Velocity).” Velocity was the key, he said; the faster the return of capital flowed in, the quicker it could be recycled into other opportunities.
“Using this model, one early investor who deployed a total of US$750K over several WWC opportunities and then kept reinvesting proceeds from refinances and divestments has now turned that US$750K into over US$4 million in principal!” he said in an August 2021 email promoting Western Wealth’s 274-unit The Carling on Frankford outside of Dallas.
Nathe was sold. She took US$50,000 stakes in four Western Wealth deals: One in Arizona and three in Texas, including the Carling. “I thought the worst-case scenario was, ‘I’ll sell for breakeven and get my money back. I’ll have a zero return,’” she said. “I thought that was the risk I was taking.”
On his podcast, Joffrey said he worked closely with LePage and referred to himself as a “partner.” He was a member of more than 40 Western Wealth-related general partnerships, advising the company on selecting markets and properties. In an interview, he described his role as helping with market analysis, deal assessment, and promotion, saying he invested heavily in Western Wealth and that the company had a lot of “big wins” before the market turned.
“I believed in these things,” said Joffrey, who lives in Santa Barbara, California. “To me, we were winning and winning and winning and winning. The reality is that what happened was pretty unprecedented in the macroeconomic world.”
‘Perfect cocktail’
The idea of pooling money from multiple investors to buy and manage real estate is an old one. However, legislation during the Obama administration opened the way for such investments to be marketed through public channels, including social media. One of the catalysts for explosive growth came from CLOs, a cousin of the high-risk financial product that inflated the subprime lending bubble of old.
The bridge loan syndicators needed to carry the buildings from purchase to rehab, and finally, the sale was too risky for many lenders. Unlike traditional long-term financing, these loans offered unusually flexible terms, requiring down payments of as little as 20% and underwriting that factored in the predicted after-renovation value two or three years in the future. They were well suited for CLOs, bonds filled with commercial debt that were packaged and sold to institutional investors eager for yield.
Syndicators “got shorter maturities and variable rates,” said Tomasz Piskorski, a Columbia University professor who studies real estate finance and credit markets. “It’s the perfect cocktail of a problem.”
The apartment boom was a bonanza for executives who shared profits and collected fees from their limited partners and for nonbanks, which kept deals flowing. According to Trepp, the fastest-moving syndicators included Tides Equities, which has about US$1.8 billion in CRE CLO exposure. Other syndicators, including GVA Real Estate Group, Nitya Capital and Ashcroft Capital, were garnering attention.
But by June 2022, all sorts of trouble appeared immediately. The Federal Reserve had started hiking interest rates at the fastest pace in a generation. A swelling supply of newly built apartments contributed to flattening rents. As the debt market dried up, sales of apartment buildings plummeted to US$28 billion in the fourth quarter of 2023, down more than 80% from two years earlier, according to MSCI.
Rents have continued to ease, with a measure of those costs falling 0.8% in the 12 months ending in May 2024, according to Apartment List.
Large institutional players who bought buildings with traditional financing, without as much leverage, were better positioned to weather the turmoil and hold onto their buildings until values appreciated. But the floating-rate debt that had supercharged profits when rates were low has become a millstone for some syndicators. With loan payments soaring and capital for renovations drying up, they risked losing buildings to foreclosure or selling for a loss, with equity investors typically last in line for payment.
Trepp data show that Tides has more than US$200 million in delinquencies in its CRE CLO debt. Lenders have their hands full, too. Ready Capital Corp. saw the share of its loans at least 60 days delinquent rise to 13% in April, more than tripling from January. One of the major lenders to syndicators, Arbor Realty Trust Inc, has been targeted by short sellers including Viceroy Research. Tides didn’t respond to requests for comment, while representatives for Ready and Arbor declined to comment.
According to an analysis by Trepp and Bloomberg News, six out of the seven borrowers with the most exposure to CRE CLO loans are apartment syndicators. Together, those firms have almost US$4 billion in outstanding debt financed through the securities, with three-quarters of the volume of loans maturing this year.
Piskorski says syndicators are such a niche part of the market that they are unlikely to threaten broader financial stability. But he said they expose fissures that are reminiscent of the early days of the Great Recession.
“When things go down, things start cracking at the boundaries of the system, where things are most fragile,” he said. “It has the same flavour as nonbank lenders in the subprime space. The more highly-levered deals go down first. It’s an early manifestation of risk.”
Plunging values
By February, western Wealth was trying to stem damage from the market’s downturn. LePage appeared on a video conference with other executives for a question-and-answer session with investors that lasted 90 minutes. During the call, she explained how some investors’ equity could be swallowed up, noting the steep drop in values across the apartment industry. She said that higher interest rates continued to bite, with rising property taxes and insurance premiums making things worse.
In the email to Bloomberg, LePage said Western Wealth is committed to protecting the value of its investors’ assets and that many of its properties have positive outlooks. She said that valuation will likely improve in coming years, with apartments still in a supply and demand imbalance across much of the country.
“Overall, we capitalised on the strong multifamily market in 2021, adopted a more reserved stance in 2022 and have maintained an ongoing conservative approach throughout 2023 and 2024,” LePage said.
But the strains have rippled throughout the firm’s ecosystem. Joffrey says his own portfolio is down by seven figures because of declines in apartment investments, including in Western Wealth deals.
“It sucks for them, it sucks for me,” he said of the investors in Western Wealth. “I can’t predict the future. We had the most rapid increases in the history of the United States, and we were designed as a short-term value-add business plan.”
The investors who spoke with Bloomberg said the value of some of their holdings had cratered. At the end of last year, Western Wealth told investors that the Carling on Frankford was under contract for a price that would erase all or most of their equity. In January, Western Wealth sold an Arlington, Texas, property that Nathe invested in called District 2308. In the email to Bloomberg, LePage said the complex was hurt by cost increases, “devastating property devaluation”, and an inability to get funding to complete upgrades.
A similar situation played out at another Arlington property called Heather Ridge, which Western Wealth bought in November 2021 with a plan to upgrade the clubhouse, pool and other areas. However, lending froze for such renovations, LePage said, and the property’s 70% loan-to-value ratio meant that equity investors were largely wiped out when values fell.
Heather Ridge was purchased in late 2023 by another real estate syndicator — a Phoenix-area company named Rise48 that has completed US$2.2 billion in transactions since its founding in 2019. By March, CEO Zach Haptonstall was on YouTube, showing off his 252-unit complex, now rebranded as Rise Heather Ridge, walking through the community in a navy-blue suit that matched his company’s logo and the fresh paint on the low-slung balconies. Nathe’s proceeds from the sale amounted to US$1,427.32, she said.
“I feel guilty,” Nathe said. “It was my own stupidity.” She’s now watching her portfolio for more trouble. She said she’d invested more of her husband’s 401(k) — an additional US$1 million — with other real estate syndicators. — Bloomberg
