Fed Rate Hikes and What This Means for Multifamily Investing?
In this post, we discuss how fed rate hikes could potentially alter the multifamily real estate market. At SCI, we actively monitor market changes both micro and macro economically to appropriately adjust our risk assessments and business plans for our multifamily investments.
Changes to Cap Rates - Increases in interest rates will likely increase cap rates. The increased cost of capital would require a lower going-in-price to generate similar returns that could be achieved prior to rate increases – in short, it’s going to cost more to earn less.
Additionally, the total amount of capital flowing into the real estate space will likely see a reduction if investors focus more attention on other securities such as fixed-income investments. These options may be more attractive investments, prompting institutions to consider allocating more of their portfolios to high-yield, fixed-income products.
The amount of capital chasing assets could act as a counterbalance to rising interest rates’ effect on cap rates. For instance, John Burns Real Estate Consulting reported in early 2022 that more than $50 billion had been invested in the SFR space since March 2020, translating into approximately 125,000 homes at the current median resale value of a house. That $50 billion was just one slice of the estimated $20.7 trillion commercial real estate sector in the United States.
Overall, CBRE forecasts the volume of U.S. commercial real estate investment this year to increase 10% compared with 2021. In part, that’s because investors’ appetite for commercial real estate has grown as the United States forges ahead with pandemic recovery. With so much capital clamoring to access multifamily real estate lower yields may be par for the course.
Changes to Debt Products - Rising interest rates could affect loan sizes for commercial properties as it would result in higher debt service payments and could lower property cash flow. Fortunately, strong rent growth in many markets could help offset the impact to borrowers impacted by rate hikes on debt service payments in multifamily real estate. For 2022, Freddie Mac envisions further multifamily rent growth will outpace inflation in most metro markets.
Additionally, higher interest rates could discourage some potential homebuyers from taking out mortgages, meaning these would-be homeowners may keep renting or could become new renters. Although the Fed’s anticipated string of interest rate hikes could cause some turbulence in commercial real estate, the strong fundamentals in the multifamily space, especially within the SFR and BTR asset class, should ease the impact of the rate hikes. In short, investment activity in these segments and other strong performers within the broader commercial real estate market should register significant growth this year. The MBA forecasts commercial and multifamily mortgage lending activity will surpass $1 trillion this year for the first time. That would represent a 13% spike compared with the estimated volume of $900 billion in 2021.
