A roundup of expert opinion on how the Fed’s latest move could affect multifamily.
By Jordana Rothberg | July 27, 2023
Very few multifamily experts were surprised by the Federal Reserve’s 25 basis point rate hike when it was announced on Wednesday. Following a pause last month, preceded by 10 consecutive rate increases, the target range is now 5.25 percent to 5.5 percent.
There are several economic factors at play influencing the Federal Reserve’s decision, but the main one remains persistent inflation, which has remained above the central bank’s 2 percent target. The federal funds rate is now the highest it has been since 2001.
“A 25 basis point increase in the Fed funds rate is a warning that the Fed remains committed to further rate increases predicated on data,” Charles Krawitz, chief capital markets officer, Alliant Credit Union, told Multi-Housing News.
Given the Fed’s goal of moderating prices and combating inflation, the markets were expecting, and had priced in, a July rate hike. Federal Reserve Chairman Jerome Powell noted, during Wednesday’s Federal Open Market Committee Press Conference, that while the central bank has covered a lot of ground, the full impacts of previous rate hikes have yet to be fully felt.
Multifamily reacts to the July rate hike
Multifamily reactions to Wednesday’s rate increase were largely positive. “The impact at this point is minimal,” said Paul Rahimian, CEO of Parkview Financial. “The change in valuations to multifamily – as well as other real estate assets – has already taken place over the past 15 months and this small increase will not change valuations any further.”
Paula Munger, vice president of research at the National Apartment Association, told MHN that another reason multifamily owners and operators may not see a major impact from this rate increase, on top of already operating in this environment for over a year, is that inflation and wages are beginning to moderate.
“However, we can expect transaction volume to remain subdued, as well as spending on major capital improvements,” Munger added. “New construction permits have already come down, and that won’t be reversing any time soon as long as construction financing remains difficult to obtain. And obviously, refinancing is a challenge as well.”
Carey Heyman, managing principal of the real estate industry at CliftonLarsonAllen, had anticipated that the Fed would deliver a “dovish” message on Wednesday to which the multifamily sector should react well.
“Such a message should invigorate investors to re-enter the market,” said Heyman. “In fact, after the Fed’s pause in June, there have been signs of improved activity across various asset classes.”
This rate hike, and ones that may follow in its path, will likely have both muted and transient impacts on multifamily, Krawitz said. The market is now looking to future rate increases, following which, rates will likely stabilize and eventually decrease. “While the precise timing of these movements remains conjecture, the overall trajectory seems to be widely embraced,” he continued.
Impact already being felt
Experts are somewhat unfazed by the potential impacts of the July interest rate increase on multifamily. However, they are acknowledging the effects that rate hikes have had on the industry.
Compared to the first quarter of 2022, sales volume in multifamily fell significantly in the first quarter of this year. John Sebree, senior vice president and national director, multi housing division, Marcus & Millichap, believes that the decrease in sales velocity has been the most significant impact of rising interest rates. “It is very difficult for a buyer or a seller to determine the value of a property without knowing what the interest rate will be at the time of closing and this has created a widened bid/ask spread which has diminished velocity,” Sebree said.
Further, increased cap rates as a result of rate hike increases has reduced the valuation of multifamily real estate assets. “Depending on the size of the property (unit count) and location, values have dropped anywhere between 5 percent to 25 percent,” Rahimian said.
The primary place Heyman says multifamily is feeling the impacts of high rates is in acquiring the right financing. “The previous interest rate hikes have primarily affected lending activity (fewer refinances, soon-to-be-expiring interest caps), which has suppressed deal flow and limited investor interest,” he said. “There continues to be a supply and demand imbalance.”
Finding the right source of financing is a more challenging task now, though there is some optimism. Multifamily properties remain more resilient than other types of real estate. Even with lower sales volume and difficulties with loan maturities, the market is still relatively strong.
Coming off of many years of extremely high profitability as a result of historically low rates, Krawitz noted that property owners are aware of the ebb and flow of multifamily.
“For those with floating rate debt, the here and now is troublesome, and absent having entered into rate hedges, borrowers are likely to face cash flow stress,” Krawitz said. “The good news is that institutional borrowers do not tend to take a snapshot approach but rather view opportunities and returns across a longer hold period.”
A glimpse ahead
Last month, the Fed’s pause on interest rates signaled to many that the hikes may be ending. While that ultimately was not the case, the prior rate pause had offered some relief to many real estate players.
“The optimists among us likely interpreted the pause as the beginning of the end, while the pessimists saw it otherwise,” said Krawitz. “I do not think the pause in June changed anything with respect to lending activity or development plans.”
If there are further rate hikes ahead, they are expected to be limited. Munger’s belief that the Fed will pause on further monetary tightening does, however, come with some caveats. There will be additional job, economic and inflation reports to factor in between now and September, for one.
“If the moderating trends continue for both inflation (especially core Consumer Price Index and core Personal Consumption Expenditures, which they are hyper-focused on) and the labor market (although it is still very strong), I think they’ll pause,” Munger said. If inflation stays sticky or moves in the wrong direction, however, she believes they may modestly hike again.
“There is a possibility that the Fed will raise rates one more time in the amount of 25 basis points, however, there is a consensus by many top businessman and others (including ex-Federal Reserve Chairman Ben Bernanke) that there should be no further rate hikes this year,” explained Rahimian.
Levels of activity in the real estate market offer cause for some optimism. “Preliminary activity indicators, such as a broker’s opinion of value newly submitted letters of intent by buyers, have begun to revive,” said Sebree. “The general consensus among multifamily institutional investors is that the level of interest rate uncertainty has greatly diminished.”
Questions as to what the future central bank meetings will bring are not getting in the way of multifamily finding opportunities, despite lower lending activity and an inhibited deal flow. With the job market remaining healthy and inflation moderating, consumer sentiment has picked up, Munger explained, furthering that this could improve demand by getting some potential residents back into the market. Opportunity can also arise from distress.
“During this time, CLA has encouraged business owners to be proactive in their cash and expense management, take the time to re-evaluate their due diligence and modeling efforts and maintain clear and transparent communication with lenders, business associates and investors,” Heyman explained. “While we believe the much reported ‘pending debt crisis’ of 2023 and 2024 might be slightly exaggerated, the likelihood of distressed multifamily assets hitting the market is high and should be an excellent buying and investment opportunity.”