When people hear the words “commercial real estate,” and especially the words “distressed commercial real estate,” they may picture an empty office building, vacant cubicles, those snacks in the break room that haven’t been touched since before we got COVID-19 vaccines.

Well, instead of empty offices, maybe a more accurate picture are empty apartments. According to the investment research company MSCI, about $80 billion in apartment mortgages are at risk of distress — that’s about $15 billion more than the total amount of office loans heading for trouble.

Back in 2021 or 2022, taking out a loan to buy or renovate an apartment building in Austin or Atlanta or Phoenix seemed like a great idea. Interest rates were super cheap, and with all those New Yorkers and San Franciscans desperate to work remotely somewhere far away from their dubstep DJ roommate, rents were skyrocketing across the Sun Belt.

It made sense — on paper.

“A lot of these investors were not experienced apartment owners, said Dave Borsos with the National Multifamily Housing Council. “And they’re not realizing some of these rent increases that they thought they could get.”

He said in some markets where too many newly constructed apartments came online, rents have declined. Austin rents are down 7.5% year over year.

And those low-interest loans? Well, when you buy or renovate an apartment building, you typically don’t lock in a 30-year fixed rate mortgage.

“Their loan that they got was floating rate and the interest rate on that has gone up,” Borsos said.

Less income from rent and higher monthly mortgage payments means more loans potentially heading to default, which isn’t just squeezing landlords, according to Julie Solar with Fitch Ratings.

“So, we do think there’s going to be a moderate amount of bank failures,” Solar said.

She said just like with local office buildings, many smaller banks are big sources of financing for local apartment buildings.

But even if they fail, Solar added those problem banks are too small to pose a systemic risk.

“The largest banks are the ones that are least exposed to commercial real estate,” Solar said.

While some landlords are in a pinch now, Stephen Buschbom at the real estate analytics firm Trepp said relief is on the horizon, interest rates are already dipping in anticipation of a Fed rate cut and there’s supposed to be way less apartment construction hitting the market next year.

“And so, what does that mean for rent growth? Rents should go up in the future,” Buschbom said.

Good news if you’re a landlord. Maybe not so good if you’re a renter that got used to living without that DJ roommate.