Expectations Reset, But Ultimately Higher Rates Won’t Deter Multifamily Investment

Interest rates are moving up, and that inevitably means higher cap rates. Many investors have moved to the sidelines to wait out the uncertainty, but multifamily is well positioned to outperform the market. That is largely due to the billions of dollars of investment capital already allocated to multifamily that needs to be put to work, even if cap rates adjust.

“We still have hundreds of billions of dollars of undeployed capital still allocated to multifamily that wants to be allocated to multifamily,” David Brickman, the former CEO of Freddie Mac and the current CEO of NewPoint Real Estate Capital, tells GlobeSt.com. “There will be some offset in all of this by simply taking the view that they were unable to deploy all of the capital before, so even if there is some risk in buying at a cap rate that could move a little, it is still better to be deployed. So, I think that is one reason why we will continue to see multifamily faring well compared to other asset classes.”

Despite the voracious appetite for apartment deals, investors will still need to adjust to the new market conditions. “People have to reset their expectations in terms of what returns will be, and that can of course can have implications in terms of where assets are priced,” says Brickman. “That doesn’t change the fundamental fact that there is a lot of investment capital that is looking to get put to work. Once things settle in, I think that we will start to see healthy flows again.”

That process has already begun. Brickman is hearing increasing stories of assets falling out contract or of deals where the price has been adjusted. “I think for some time, you have had buyers and sellers not agreeing on exactly where values will be, and part of that depends on where rates will settle out,” says Brickman. “That process is perfectly natural, and it may take less time these days because of technology, but I would say that is generally a three-to-six-month process, and then you get to a new level.”

That new level is a higher cap rate environment, which Brickman says is almost certain. After that adjustment, capital flows will resume. “There is still a significant amount of wealth formation that is occurring and will occur,” he says. “Real estate continues to be a really attractive investment and multifamily continues to be an attractive investment. Once you get through that re-pricing process, I think we will continue to see healthy flows.”