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The Discount Was in the Tail
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Trepp's September numbers came out last week, and multifamily crossed a line it has not crossed since Covid. The multifamily CMBS delinquency rate hit 8.04 percent, above the overall CMBS rate of 8.02 percent, up 471 basis points in two years. Rents, meanwhile, are up 1.5 percent year over year according to Apartments.com. The apartment market is finally being priced, and the prices are not coming from appraisals. They are coming through the back door: workouts, retrades and liquidations. The cleanest of these is Elme Communities, which closed its last two properties on September 28 and will dissolve in November. A listed REIT that sells everything is an example of what it looks like when you convert an estimated NAV into a realized number. That almost never happens, so it is worth looking at what the number was. Elme sold a 19-property portfolio to an affiliate of Cortland for about $1.6 billion in November 2025 and paid $14.67 per share in January. At that point it estimated another $2.35 to $2.80 per share from the remaining ten assets, a total of $17.02 to $17.47. By May, the estimate was revised down to $16.74 to $17.02. In June, the buyer of Riverside Apartments, the largest remaining asset, walked during its inspection period. Elme re-contracted Riverside at $250.0 million in July and cut the range (again) to $16.41 to $16.61, citing a soft D.C. market and a thin buyer pool for large assets. The final two properties, 3801 Connecticut Avenue and The Kenmore, closed for $110 million combined, each contract having been reinstated and amended three times along the way. The last distribution was $1.74. The final total was $16.41 per share, the bottom of the July range. Against the midpoint of the original estimate, $17.245, that is down $0.835, or 4.8%. Sounds like a rounding error. It isn't, because nearly all of it landed on the tail. The midpoint of the original residual estimate was $2.575 per share. Shareholders got $1.74, a 32 percent shortfall on the money that was still at risk. In dollars: the $14.67 distribution totaled roughly $1.3 billion, which implies about 88.6 million shares, so the shortfall is roughly $74 million. The ten assets sold in 2026 brought in about $712 million gross. The shortfall equals about 10 percent of that. Not all of it is price, since Elme also carried more G&A and debt service while the sales dragged on. But the order of magnitude is the point. The portfolio cleared near management's view of value. The tail, sold one asset at a time into a softening market, under deadline, with D.C.'s TOPA process layered on top, cleared about a tenth below it. This is where people misuse forced marks. Liquidations, retrades and CMBS workouts are better evidence than appraisals, but they are not a random sample. A distressed CMBS sale tells you what an asset is worth to a buyer who knows the seller has no choice. Elme's tail tells you what good assets are worth when they are sold under time pressure, after the best-fitting buyer has already had the pick of the litter. Neither is a clearing price for a patient owner who can take his time. Use them as comps without adjusting and you will set exit cap rates too high on your good assets and too low on the ones you are actually likely to sell under pressure. So, in short, when a forced sale shows up in your comp set, ask what drove the discount. It's going to be one of the following three: the asset, the debt, or the calendar. Then ask whether your own exit looks more like that seller's situation or less. For anyone running a fund wind-down or a portfolio disposition, model the tail separately from the core. Assume the last assets take longer, draw fewer bidders and retrade at least once, and carry the G&A, debt service and reserves for that extra time. Optimism isn't a plan. Thoughts? On your last disposition, did the final assets clear where you underwrote them, or did the tail cost you more than you would have thought it would? Sources: In other news, I'm still offering on-demand financial modeling courses that are tailored to the commercial real estate industry. Interested? Check out my "Everything" package; I've distilled years of financial modeling experience into easy-to-follow videos with supporting spreadsheets. Like what you're reading? Want to share the love? Pass it on. You can sign up or read archived issues here: https://newsletter.kahrrealestate.com/ |
Kahr Notes
Every two weeks, I publish a newsletter on commercial real estate topics such as financial modeling, asset management, and portfolio management. Subscribe to my newsletter.
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