Home Rental industry How Rising Interest Rates Are Affecting Multifamily Homes – Multifamily Real Estate News

How Rising Interest Rates Are Affecting Multifamily Homes – Multifamily Real Estate News

Federal Reserve Chairman Jerome Powell announces a 75 basis point rate hike on September 21. Image courtesy of the Federal Reserve via Flickr

As widely anticipated, the Federal Reserve again raised the federal funds target by 75 basis points on Wednesday afternoon. The rate hike announcement is aimed at both reducing demand and reducing inflation over the coming months. Reaction to the announcement from multifamily industry watchers was swift.

“This week’s rate increase was expected, especially after the CPI report earlier in the month,” said Dave Borsos, vice president of capital markets at the National Multifamily Housing Council. Multi-Accommodation News. “Looking forward, investors will need to continue to watch the pace of inflation closely, and whether the Fed can begin to consider lower rate increases. However, if inflation continues at a high level, the Fed clearly announced that it would keep the rate hiked until inflation was under control.

The multi-family sector was not as affected by the rise in interest rates as the single-family industry. “However, alongside the broader economy, if high interest rates remain persistent for the foreseeable future, there will be a negative impact on development, despite the high demand we are currently experiencing,” Borsos added.

Ongoing changes

The Fed continues to use the main weapon at its disposal – interest rates – as it battles persistently high inflation, noted Jamie Woodwell, vice president of commercial real estate research at the Mortgage. Bankers Association. The negative impacts of inflation are seen in multi-family development. Costs have increased over the past year, with the result that each new unit is becoming more expensive to build, he said.

“The downside of Fed actions, however, can also be seen in the fact that each rate hike makes it more expensive to build and finance apartments, making it harder to land new deals,” he said. he declared. “Fed actions had a more pronounced effect on short-term rates than on long-term rates. Despite everything, the cost of long-term borrowings has roughly doubled since the start of the year.

“As a result, after a record start to the year for borrowing and lending, we expect a marked slowdown in the second half of the year as developers, buyers, sellers, lenders and others all adjust to the continued changes in market conditions. market,” Woodwell added. “At this point, it is not that there is a lack of equity or debt financing available. It is because the market adapts to the conditions and rates of this financing.

Liquidity exists for both debt and equity transactions. But capital is more selective and has turned to low-risk profiles, said Kelli Carhart, head of multifamily debt production for CBRE. The current environment makes it difficult to fund large loans. Sales of multifamily investments are expected to fall for the rest of 2022, but activity remained at historic levels.

“Headwinds, including rising rates, falling leverage and increased equity controls putting pressure on yields, will continue to impact the market,” he said. she declared. “Investors are still waiting for cap rates to adjust and for interest rates to continue to rise.”

Rising rates have no immediate or direct impact on obtaining fixed rate financing, said Marcus Duley, chief investment officer of Walker & Dunlop Investment Partners.

Increases in 7- and 10-year Treasury yields are impacting fixed-rate lending, he added. As the Fed raises the federal funds target range, index rates such as SOFR futures or LIBOR typically also rise. “With index rates rising and now lenders wanting much higher spreads, floating rate loans are becoming more expensive, coupled with a lower product based on actual DSCR constraints and a much higher cost for caps. interest rates charged by lenders.”

Most impacted

Basic market assets and value-added investments, since these transactions have often been financed with floating rate debt, are the most likely to be the type of product negatively affected. Investors could face significant negative leverage that would make it difficult to meet debt service obligations, said David Scherer, co-CEO of Origin Investments. “The construction to let (BFR) sector could be one of the biggest beneficiaries of the current rate hike and the cumulative increases that have taken place,” he said.

“There are literally millions of current tenants and potential landlords who are trapped. They were excluded from buying their first home. BFR creates the same housing dynamics without the financial burden.

Underlying multifamily fundamentals are still good, Carhart said. Although rent increases are expected to moderate, overall housing demand is robust. “The lack of affordable housing will also continue to drive demand in this space,” she said, noting that higher mortgage rates and the lack of affordability of single-family homes will benefit multi-family homes.

Doug Prickett, senior managing director, investment research and analysis at Transwestern, agrees. Demand in the rental market is expected to remain strong as the alternative market for sale becomes less affordable, he said. But at the same time, new supply could slow due to rising costs and the declining availability of construction finance.

“With an already existing housing shortage, demand pressure on existing products will intensify,” Prickett concluded. Three months ago, another rate hike boosted sentiment among multifamily watchers.