Inflation—and interest rates—are at the center of the American economic conversation. And for good reason. Despite a series of interest rate cuts and hikes in recent years, the last time inflation was at or below the Fed’s 2% target was 2020. 

Macroeconomic and geopolitical trends impacting CRE

Federal policies on regulation and immigration remain top of mind for investors, as do geopolitical tensions and macroeconomic issues, including:

• The new Fed Chair: Chairman Kevin Warsh has made a few notable changes since taking seat in May. Chief among them is eschewing “forward guidance” from the Fed, favoring a quieter central bank that relies on real-time market signals and data. He has also created five task forces—focused on balance sheet policy, communications, data, inflation frameworks, and productivity and jobs—to conduct an independent review of the Fed’s policymaking process. “After a bit of a rocky start, Fed Chair Warsh has gained credibility in the market by taking concrete steps to curb inflation in spite of his own earlier leanings and political pressure,” Kraft said. 
• The Middle Eastern conflict: The ongoing conflict has caused fuel costs to rise and pushed inflation further above its 2% target. “While there are structural reasons for higher interest rates at the long end of the yield curve, the conflict has amplified the trend toward higher rates (and certainly to volatility) through the erratic impact on crude oil prices,” Kraft said. The Fed had largely taken a wait-and-see approach regarding the conflict. But with no end in sight and a resilient labor market there has been increased opportunity to increase benchmark rates to tamp down inflation. 
• Tariffs and trade policy uncertainty: Both continue to impact commercial real estate. The recent 50% tariff on Canadian goods includes construction materials, increasing already high construction costs and further delaying key decisions. 
• Treasury bond buybacks: According to the U.S. Department of the Treasury, it’s “increasing, by at least double, the size of liquidity support buyback operations for longer-dated nominal coupon securities (the 10-year to 20-year sector and the 20-year to 30-year sector). The current maximum size of $2 billion per operation will be at least $4 billion per operation.” “Treasury bond buybacks and other signaling from Treasury Secretary Bessent are meant to contain long end Treasury yields but may not be significant enough to have sustained effect,” said Ginger Chambless, Head of Market Insights for Commercial Banking at J.P. Morgan, said. 

“While economic growth is resilient, expect continued elevated inflation and relatively stable labor markets to drive an additional 25 bps hike at the December meeting,” Chambless said.

What interest-rate hikes mean for multifamily investors

“Housing is one of the most sensitive sectors in the economy to changes in interest rates,” Chambless said. “Broader concerns that a commercial real estate downturn could cause a recession or market correction have subsided. The higher interest rate environment and elevated inflation remain headwinds.”

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 continue to 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 can benefit from the current economic environment. It offers them an opportunity for portfolio growth at a lower cost.

“As always, be prepared in advance to take advantage of opportunities that may materialize from time to time, such as being able to rate lock rapidly to take advantage of brief dips in rates should they occur,” Kraft said. “In addition, become well acquainted with all available products—ARMs, hybrids or fixed rates—and select the ones that best suit your cash flow needs, attitude towards risk and view of the market.”

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. In some multifamily markets, such as Denver and Washington, D.C., there’s an oversupply of market-rate and luxury properties.
• 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

“Unlike short term interest rates, fixed rates can rarely be forecasted with any degree of certainty,” Kraft said. “But under present circumstances, about all that can be counted on is continued volatility.” 

“Macroeconomic and market uncertainty remains relatively high,” Chambless said. “Despite the shift higher in inflation and interest rates since the beginning of the year, economic growth has held steady.”