Not surprisingly, a third-quarter Mortage Bankers Association (MBA) report says delinquencies rose in the multifamily business (and all of commercial real estate) from the second to third quarters. While the 90-day-plus delinquency rate on Freddie Mac remained unchanged, Fannie Mae’s 60-day-plus delinquencies rose 0.11 percentage points.

Add in commercial loans, and the picture grows drearier. The 30-day commercial mortgage-backed securities (CMBS) rose 0.17 percentage points to 4.06 percent. The 60-plus day delinquency rate on loans held in life company portfolios rose 0.08 percentage points to 0.23 percent. Finally, the 90-day-plus delinquency rate on loans held by FDIC-insured banks and thrifts rose 0.51 percentage points to 3.43 percent.

Despite the extend-and-pretend policies of this institution so far, Mike Kelly, president and co-founder of Denver-based Caldera Asset Management, a turnaround management and restructuring consulting company specializing in multifamily loans, thinks institutions will eventually have to sell these assets, especially value-add deals. That opinion is in stark contrast to growing number of voices within the industry who don’t see distressed assets reaching levels predicted earlier this year. “The distress will come in 2010,” Kelly says.

Others agree. “There’s going to be a lot of distressed assets that have yet to hit the street,” says Robert E. Hart, CEO and president  KW Multifamily Management Group, an apartment owner in Beverly Hills, Calif. “Some are coming through FDIC and some are coming through small bank notes.”

Kelly sees deals bought as value-add plays causing problems as owners realize they can’t get the rent that they originally pro-formaed. “As the year progresses, you’ll start seeing the B product [hit the market],” he says. “A lot of owners who bought value add deals won’t write the check forever.”

Bill Shippen, a principal in the Atlanta office of Apartment Realty Advisors sees issues with value add deals from the 1980s. “They [the owners] came in and bought at aggressive cap rates with anticipation of moving rents $100 or $200 with cabinets and granite countertops,” he says. “Now, NOI is 10 percent or 15 percent less than when they bought at. There’s really nothing to work out with banks they’re so incredibly upside down.”

If this scenario plays out as expected, Kelly thinks that by the latter part of next year, realistic buyers could start finding deals. “The second part of the year is when people who raised money and who have a reasonable return expectation will be able to start accumulating assets,” he says.