Nat Barganier

MIAMI—From Miami to Tampa and beyond, there is a significant new pipeline of multifamily units on the Florida horizons. At the same time, sales transactions continue to move quickly for rightly-priced properties. Will that change in the face of rising interest rates? caught up with Nat Barganier, managing director of Investment Services, and John Stone, principal and managing director of Multi-Family Housing, of Colliers International Tampa Bay, to get their take on that question. Barganier and Stone recently produced a report on “Rising Interest Rates and Multifamily Values.” Have higher interest rates had an impact in recent weeks on multifamily sales or development?

Barganier: There definitely appears to be more investment fear over the past several weeks. We have seen a rash of new requests for debt pricing from our mortgage resources, and we’ve had a substantial increase in the volume of requests for BOVs from both lenders and owners.

Smart investors are pushing to lock in new debt financing now. When interest rates jump unexpectedly, market transactions often “blow up” or re-price. Although cash transactions may not be affected, interest rate increases have a significant effect on purchase cap rates, after-debt cash flow and overall investment yield.

Stone: Going forward, for every 100-basis-point increase in interest rates, a property’s net operating income would need to increase 14% to 15% to maintain the same property value. And this is a real concern: Fannie Mae rates on debt with a 25- to 30-year term and 10-year amortization have jumped dramatically, from 4.3% to 5%, over the past several weeks. How do higher interest rates and the multifamily supply-and-demand situation impact sales and development?

Barganier: In light of the investor concern, coupled with the expanding supply of units, it makes rental increases in “A” product a bit tougher. When the supply was constrained in 2009 to 2011 and the single-family housing market was weak, many apartment owners increased effective rental rates 7% to 10% annually. Those days are gone until after 2015, as most of the rental spike has been realized in “A” product for the near-term.

During the latter half of 2010, apartment cap rates began to decline as the appetite for multifamily investment re-emerged. Transaction volume was lower compared to the boom years from 2005 to 2007, but for properties that did transact, cap rates began compressing, falling at a faster rate than the interest rate decline.

This has opened the door for “B” and “C” apartment reposition plays. During the downturn there was a flight to quality by tenants, attracted by affordable rental rates. Now that rates in “A” product are at an all-time high, the focus by investors and tenants has transitioned back to “B” and “C” product. Many “B-C” repositions can raise rents by $50 to $100 a month and still be well under the average of “A” rentals in the same competitive three-mile radius.

Be sure to come back this afternoon for the second installment of this three-part exclusive Q&A.