Why Apartments Deteriorate When Interest Rates Rise

If your landlord keeps ignoring a leak in your apartment, there's a decent chance it's on purpose. For a lot of owners right now, paying to fix it just hands money to their bank. An exec who oversees 150,000 apartments says buildings are falling apart fast because of it. Here's how a landlord ends up there. Back in 2021, investors were paying crazy prices for apartments. A $100 million building might only bring in about $3.8 million a year after expenses, and people paid it anyway because money was basically free. The buyer puts down $30 million, borrows $70 million at around 3% on a loan whose rate moves with the Fed, and pays about $2.1 million a year in interest. The building covers that almost twice over and everybody feels like a genius. Then the Fed jacked rates up more than 5 points in about a year and a half. Now buyers want something like a 5.5% return on that same building. Same $3.8 million in income, but at 5.5% the building's only worth about $69 million. And the owner still owes $70 million. So the $30 million they put in is gone, and not one tenant moved out. It gets worse because the loan floats. The interest bill is now over $4 million a year on $3.8 million of income, and rents in Phoenix, Denver and Austin are down 5 to 6% since 2023. Every month the owner has to pick. Write a check out of pocket to cover the hole, or stop spending money on the building. Economists have had a name for this since 1977. Stewart Myers called it debt overhang. When you owe more than something is worth, any money you put into it makes it more valuable for whoever ends up owning it, and if the bank forecloses, that's the bank. Spend $500,000 on a new roof and you've basically handed the bank $500,000. So a lot of owners just sit on their cash and let the leak become water damage, then mold, then a building nobody can live in. The bank is doing the same math from the other side. If it forecloses, it gets a $69 million building with mold in the walls and has to eat the loss right now. If it extends the loan, it can keep carrying it near full value and hope rates come down. Lenders extended a record $384 billion in commercial real estate loans heading into 2025. The exec says some big-name funds haven't paid their mortgages in two or three years and their banks still haven't foreclosed. The official numbers are finally starting to show it. Freddie Mac's apartment loan delinquency rate is higher than it was at the 2011 peak, the worst in over 20 years. Apartment loans in commercial mortgage bonds hit 8.04% delinquent in September, up from 6.59% a year ago. Then on September 16 the Fed raised rates for the first time since 2023, and every one of those floating-rate loans got more expensive the next month. Asked how this all ends, the exec said there's a chance it's just "a decade of tolerable pain," and they're praying for that. Honestly, I get why. A slow decade lets the owner and the bank put off the loss for as long as they want. The people living in those buildings are stuck waiting it out, and the roof keeps leaking the whole time.

— Aakash Gupta (@aakashgupta) October 23, 2026

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If your landlord keeps ignoring a leak in your apartment, there's a decent chance it's on purpose. For a lot of owners right now, paying to fix it just hands money to their bank. An exec who oversees 150,000 apartments says buildings are falling apart fast because of it.

Here's how a landlord ends up there.

Back in 2021, investors were paying crazy prices for apartments. A $100 million building might only bring in about $3.8 million a year after expenses, and people paid it anyway because money was basically free. The buyer puts down $30 million, borrows $70 million at around 3% on a loan whose rate moves with the Fed, and pays about $2.1 million a year in interest. The building covers that almost twice over and everybody feels like a genius.



Then the Fed jacked rates up more than 5 points in about a year and a half. Now buyers want something like a 5.5% return on that same building. Same $3.8 million in income, but at 5.5% the building's only worth about $69 million. And the owner still owes $70 million.

So the $30 million they put in is gone, and not one tenant moved out. It gets worse because the loan floats. The interest bill is now over $4 million a year on $3.8 million of income, and rents in Phoenix, Denver and Austin are down 5 to 6% since 2023. Every month the owner has to pick. Write a check out of pocket to cover the hole, or stop spending money on the building.

Economists have had a name for this since 1977. Stewart Myers called it debt overhang. When you owe more than something is worth, any money you put into it makes it more valuable for whoever ends up owning it, and if the bank forecloses, that's the bank. Spend $500,000 on a new roof and you've basically handed the bank $500,000. So a lot of owners just sit on their cash and let the leak become water damage, then mold, then a building nobody can live in.

The bank is doing the same math from the other side. If it forecloses, it gets a $69 million building with mold in the walls and has to eat the loss right now. If it extends the loan, it can keep carrying it near full value and hope rates come down. Lenders extended a record $384 billion in commercial real estate loans heading into 2025. The exec says some big-name funds haven't paid their mortgages in two or three years and their banks still haven't foreclosed.

The official numbers are finally starting to show it. Freddie Mac's apartment loan delinquency rate is higher than it was at the 2011 peak, the worst in over 20 years. Apartment loans in commercial mortgage bonds hit 8.04% delinquent in September, up from 6.59% a year ago. Then on September 16 the Fed raised rates for the first time since 2023, and every one of those floating-rate loans got more expensive the next month.

Asked how this all ends, the exec said there's a chance it's just "a decade of tolerable pain," and they're praying for that. Honestly, I get why. A slow decade lets the owner and the bank put off the loss for as long as they want. The people living in those buildings are stuck waiting it out, and the roof keeps leaking the whole time.