Effects of Interest Rate Increase on Multifamily

Following the most recent rise by the Federal Reserve, experts offer advice on what to watch.

As expected, the Federal Reserve increased the federal funds target by 75 basis points on Wednesday afternoon. The rate hike announcement is meant to both curb demand and bring down inflation in the upcoming months. The statement was met with an immediate response from watchers in the multifamily sector.
In particular, following the CPI data earlier in the month, this week’s rate rise was anticipated, according to Dave Borsos, vice president for capital markets at the National Multifamily Housing Council, who spoke with Multi-Housing News. As we move forward, investors will need to keep a careful eye on the rate of inflation and whether the Fed may start thinking about lower rate hikes. However, the Fed has made it plain that if inflation is high, rates will continue to rise until it is brought under control.
Compared to the single-family industry, the multifamily sector hasn’t been as negatively impacted by rising interest rates. Despite the robust demand we are now seeing, Borsos continued, “However, coupled with the larger economy, high-interest rates will have a negative influence on development if they endure for the foreseeable future.”

Ongoing adjustments 

Jamie Woodwell, the vice president of commercial real estate research for the Mortgage Bankers Association, emphasized that the Fed is still fighting persistently high inflation by using the main tool at its disposal: interest rates. The detrimental effects of inflation can be apparent in multifamily construction. According to him, costs have increased over the previous year, making it more expensive to construct each new unit.

The drawback of the Fed’s activities, he continued, can also be seen in the fact that every increase in interest rates raises the cost of developing and financing apartment buildings and makes it more difficult for new deals to be financially viable. “Shorter-term rates have been significantly more impacted by the Fed’s policies than longer-term rates. However, since the start of the year, the cost of long-term borrowing has nearly doubled.

After a record-breaking first quarter for borrowing and lending, Woodwell continued, “As a result, we foresee a marked slowdown in the second half as developers, purchasers, sellers, lenders, and others adjust to the continuous changes in market circumstances.” It’s not that there isn’t enough loan or equity capital available at this time. The market is changing to reflect the conditions and interest rates of that funding.

Both debt and equity transactions can be liquidated. However, Kelli Carhart, head of multifamily debt production for CBRE, noted that capital is now more selective and has tended to favor lower-risk profiles. Financing significant debts is difficult in the current climate. Multifamily investment sales are expected to decline for the rest of 2022, but activity has remained steady at historical levels.

The market would continue to be impacted by headwinds including rising rates, reducing leverage and greater equity checks that reduce returns, she said. Investors are still anticipating changes in cap rates and an increase in interest rates.

According to Marcus Duley, chief investment officer of Walker & Dunlop Investment Partners, the rate hike has little to no immediate or direct impact on obtaining fixed-rate financing.

He continued that fixed-rate loans are impacted by increases in the yields for 7-year and 10-year Treasuries. Index rates, such as the SOFR or LIBOR, often rise in tandem with the Fed’s expansion of the Fed funds target range. “Floating-rate loans are getting more expensive, along with less proceeds based on actual DSCR limits and a substantially higher cost for lender-required interest rate caps, as a result of both rising index rates and lenders’ new demand for significantly bigger spreads.”

Greatest influence

Given that these transactions have frequently been financed with variable-rate debt, core market assets and value-add initiatives are most likely to be negatively impacted. According to David Scherer, co-CEO of Origin Investments, large negative leverage could be encountered by investors, making it difficult to meet debt servicing commitments. The build-for-rent (BFR) industry would benefit the most from the recent rate increase and other cumulative hikes, he claimed.

“There are actually millions of people who want to buy homes but are imprisoned as renters. They can no longer afford to purchase their first homes. The same housing dynamic is produced by BFR without the associated costs.

According to Carhart, the foundations for multifamily housing are still strong. Although mild rent hikes are anticipated, there is a strong demand for housing overall. She added that increased mortgage rates and the dearth of cheap single-family homes will favor multifamily, adding that “a scarcity of affordable housing will also continue to drive demand in that market.”

Transwestern’s Doug Prickett, senior managing director of research and investment analytics, concurred. According to him, demand in the rental sector should continue to be high as the alternative for-sale market becomes less accessible. However, new supply may also decline as a result of rising costs and dwindling construction financing options.

“Demand pressure on existing product will be exacerbated by an already existing lack of housing supply,” Prickett concluded. Observers of the multifamily industry expressed strong sentiments three months ago following another rate increase.

The SVN Vanguard team can help with your multifamily real estate needs. We can help you find the ideal multifamily property for sale or lease. Interested in discussing a sale-leaseback? Contact us.

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