Commercial Real Estate
What interest rate hikes mean for multifamily property investors
As the Fed continues to ramp up interest rates, find out how increases could impact real estate investors.
Inflation—and rising interest rates—are at the center of the American economic conversation. And for good reason. In 2022, the Federal Open Market Committee (FOMC) raised rates by 75 bp four consecutive times between June and November.
In December 2022, the Fed raised rates by 50 basis points, bringing the target federal funds range to 4.25% to 4.50%.
While inflation has slowed in recent months, it remains near 40-year highs. Combined with historically tight labor markets that are driving higher wages, “we're in uncharted territory,” said Ginger Chambless, Head of Research for Commercial Banking at JPMorgan Chase. “As a result, the Fed is currently tightening monetary policy as rapidly as ever.”
Rate hikes may not impact all financing structures
Interest rate hikes may impact short-term and adjustable rate loans more than long-term, fixed-rate ones.
“The Fed’s actions on short-term rates don’t directly translate to a like effect on fixed rates underlying commercial real estate mortgages. After any Fed rate hike, it’s possible that fixed rates might rise or fall depending on circumstances,” said Mike Kraft, Commercial Real Estate Treasurer for Commercial Banking at JPMorgan Chase.
For investors with fixed-rate loans, you may also want to keep an eye on the Treasury yields, which help determine mortgage rates. The Treasury yield is viewed as a sign of investor sentiment about the economy. Yields are driven by the market and aren’t directly under the Fed’s control. “Treasury yields depend on long-term inflationary expectations, on the market’s assessment as to whether an economic downturn is impending,” Kraft said.
As of December 2022, yields are near the low end of that range. “While they will certainly continue to move about, they are not likely to take off in the immediate future,” he said.
What interest-rate hikes mean for multifamily investors
“As one of the most sensitive sectors in the economy to changes in interest rates, housing activity has weakened significantly in the last few quarters of 2022,” Chambless wrote in her 2023 Outlook. “However, demand for multifamily housing has held up amid tight single-family home supply and affordability challenges, with multifamily housing starts still close to the highs of the cycle.”
The Fed anticipates more increases in early 2023. While multifamily property owners and investors may feel the negative effects of rising interest rates, there may also be some offsets.
Higher interest rates could price would-be homebuyers out of the single-family housing market, causing them to remain renters for longer. Inflation, along with rising costs and construction delays may increase existing properties’ rents.
Multifamily property owners and investors with fortress balance sheets in particular can benefit from the current economic environment, offering an opportunity to grow their portfolio at a lower cost.
Looking beyond interest rates
For those looking to purchase a multifamily property or refinance their apartment complex, there’s more to look at than interest rates. Consider other factors, including:
- Supply, demand and demographic shifts: The housing inventory—especially affordable housing—is low, with demand outpacing supply. Likewise, more people have moved to the center of the country and are seeking workforce housing. Investors may also want to weigh the merit of a shift from suburbs to cities.
- Local market: Real estate is a largely local business, so investors may want to take a close look at the specifics of the market before purchasing or refinancing. It’s also important to evaluate each property individually, including its capitalization rate, which generally goes up when interest rates increase.
What’s next for interest rates, inflation and the economy
“While inflation is likely to remain somewhat elevated through the end of 2023, we see signs that a moderation is already underway and that this cooling will become more prominent over time,” Chambless said.
Interest rate fluctuations could correspond. “The Fed’s own projections indicate that the target would top out at 5.25% by the end of 2023,” Kraft said. “Markets have treated this forecast with skepticism, with futures implying a maximum 5.00% target by May. Shortly after that, markets imply a ‘pivot’ by year end—at some point, the Fed could begin easing to accommodate a possible economic downturn. The Fed itself doesn’t project such a pivot, maintaining that it will be necessary to hold rates at a higher level for a while to bring inflation in check.”
Unexpected national and international geopolitical uncertainties may continually arise, resulting in market volatility and interest rate fluctuations.
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