This article is part of The Rooftop, a blog and multimedia series from New America’s Future of Land and Housing program. Featuring insights from experts across diverse fields, the series is a home for bold ideas to improve housing in the United States and globally.
by Caroline Nagy, Associate Director of Housing Policy, Americans for Financial Reform
This July, the Sophia Apartments, a 377-unit, two-story, garden-style apartment complex in Dallas, was sold for $17.7 million in a foreclosure auction after its owner S2 Capital defaulted on its mortgage. When S2 purchased the 1960s-era complex in 2021, its net cash flow was underwritten at $2.8 million’ by 2025 that had fallen to $686,000. In 2021 and 2022, buoyed by low interest rates and rapidly-climbing rents, S2 Capital acquired a large portfolio of older Texas apartment complexes at record prices. The company expected to fix up the properties, increase rents, and ultimately sell them at a profit. Despite the eye-popping purchase price and its implication of severe rent hikes for tenants, Freddie Mac provided federal government backing of these purchases with floating-rate commercial mortgage-backed securities loans.
However, S2 was ultimately unable to squeeze sufficient proceeds from the building, facing growing operating costs and brutal interest rates, while being unable to sufficiently raise rents or skimp on repairs. As a result, S2 informed investors in its $400 million “value-add” multifamily investment fund that they were dissolving the fund and that investors would see no returns whatsoever. Meanwhile, the Sophia’s tenants, who had no control over any aspect of the 2021 purchase or its questionable financing, are stuck living in a building where they report degrading building conditions, water leaks, and rat infestations.
Multifamily Distress is Growing Nationally
Unfortunately, this story is playing out across the country, as increasing numbers of building portfolios fall into distress. Despite high rents, a significant and growing amount of our older rental housing stock is currently struggling. Multifamily mortgage-backed securities reached a record high delinquency rate of 7.71 percent in 2026, up from 1 percent in October 2023, and, nationally, landlords and their investors are facing more than $1.8 trillion in debt that will become due over the next decade.
The news that landlords are facing widespread financial distress may come as a surprise to many U.S. renters, who continue to struggle with rents that remain unaffordable when compared to their incomes. In 2024, 49 percent of all renters spent more than 30 percent of their income on rent and utilities, and more than half of renters are cost-burdened in 12 states, led by Florida, Nevada, and California. After several years of record rent increases, median rents for new leases have flattened, with some cities seeing modest decreases from the 2022-2023 peak. Regardless, rents remain significantly higher than pre-pandemic numbers: Zillow estimates they’ve increased by 35 percent.
What’s Driving this Distress?
Several factors have combined to cause this record-high distress:
High interest rates: The cost of borrowing has remained stubbornly high and is increasing due to rising global uncertainty and persistent inflation. In 2020-2022, apartment mortgage rates were at record lows of 3 percent, leading to a boom in apartment purchases and refinances. Many of these loans were either floating-rate loans or have matured and must be refinanced at double the cost. This has caused a significant financial crunch for landlords nationwide.
Irresponsible financing based on unrealistic rent increase prospects: One real estate investor described the 2020-2022 lending climate as “a sense of relative euphoria:” rates were low, rents were spiking, and pandemic-related declines in office space and hospitality meant that commercial real estate investors had significant amounts of money to invest in multifamily real estate. As a result, lenders made too many overvalued and unrealistic loans, resulting in heavy debt burdens imposed on properties that could only be paid back if the landlord succeeded in hiking rents, plied tenants with deceptive junk fees, neglected maintenance, and evicted lower-paying tenants. Thus, this financing boom drove up both rents and mortgage delinquency rates, harming tenants, allowing buildings to fall into disrepair, and putting the broader financial system at risk.
New housing construction: While rents have increased overall since 2020, rent growth has flattened in some parts of the country, with some cities experiencing modest declines. This is largely due to generationally high levels of new multifamily construction: the 608,000 units completed in 2024 represented the highest total seen since 1986. The vast majority of these new units (75 percent) were constructed in the U.S. southern and western regions. As a result, investors like S2 who focused on purchasing existing, older apartments in Texas and Florida found that they were unable to compete with the new builds for top rents, despite their optimistic projections to investors.
Increased operating costs: Multifamily landlords have seen their operating costs increase in recent years, reducing their net operating income. Between 2019 and 2024, multifamily buildings in the U.S. experienced more than a 75 percent increase in property insurance costs on average, with even steeper increases among affordable housing providers. Utility costs have also increased, as have building repair and renovation costs, due to high interest rates, increased transportation costs, tariffs, and higher labor costs.
What Can Be Done? Deploy Anti-Displacement Preservation Strategies
The growing multifamily distress crisis will harm tenants as landlords seek to raise rents and reduce building maintenance in increasingly desperate efforts to maintain solvency. In addition to a serious evaluation of irresponsible and extractive multifamily lending practices, and particularly why Fannie Mae and Freddie Mac provided federally-backed guarantees to these loans, the U.S. must rapidly scale financial and policy interventions that will take distressed, unsubsidized apartments out of the financing doom spiral and preserve them as affordable housing.
Most multifamily buildings will avoid the extreme outcomes faced by the Sophia Apartments in Dallas. However, many distressed buildings are home to lower-income families who cannot afford higher rents and will struggle to find suitable housing if displaced due to evictions or poor living conditions. And, unfortunately, the U.S. is losing what remains of its unsubsidized, private rental stock at a rate faster than it can be replaced, due to rising rents and stagnant incomes.
Fortunately, a number of promising state and local programs fund the acquisition and rehabilitation of distressed multifamily rentals with the goal of preserving affordability:
- Washington, DC’s District Opportunity to Purchase Program requires rental property owners to give the District a chance to buy larger apartment buildings with at least 25 percent of the units affordable before selling to a private buyer. The program’s goals are to preserve affordable rental housing while addressing properties that are at risk of further distress.
- In Tennessee, Invest Chattanooga is a city-backed fund that was recently profiled in the New York Times for its innovative model, which directly invests patient capital for the acquisition and renovation of older, unsubsidized apartment buildings with the condition that the property must maintain affordability.
- Finally, this September, California passed legislation to create the Community Anti-Displacement and Preservation Program, the state’s first acquisition preservation program for affordable, unsubsidized, private rental housing, with an anticipated $200 million in initialed funding approved by voters through California’s statewide housing bond this November.
Bringing these solutions to scale will necessarily involve significant amounts of money. In addition to expanding public support, decision-makers and lenders should revisit investment models for pools of patient capital that cut out extractive asset managers and can finance both the preservation of existing housing and the creation of new multifamily units, as an alternative to the speculative, irresponsible lending that helped to create our current, unprecedented multifamily distress crisis.
This article was originally published on the New America website on November 10, 2026.