Multifamily investors may be coming to terms with the new interest rate climate, which is a good thing since the Federal Reserve has signaled it is not ready to lower rates further at this time.
When the central bank met last week, it declined to change the overnight rate and also didn’t change its position on quantitative tightening.
“They’re still letting $25 billion of long-term treasuries and securities burn off their balance sheet each month,” said Marcus & Millichap national director of research and advisory services John Chang. He speculated the Fed is waiting for policy and fiscal plan details from the President and Congress before making their next move. The Fed next meets on March 19, but Wall Street is leaning toward no rate cuts at that meeting either, Chang said.
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“According to Fed Watch, there's about a 45% chance of a rate cut in May and a 70% chance there will be at least one rate cut by the Fed's June 18 meeting,” he said.
Multifamily Investors have been waiting for interest rates to fall over the past couple of years, but it appears sentiment has shifted. Investors are acknowledging that there's a low probability the 10-year treasury will fall below 4% this year, and they are adapting their strategies to accommodate a higher interest rate climate.
Chang said numerous clients have indicated they plan to be more aggressive in 2025, including some with plans to sell assets in which their capital is tied up but the properties are not performing to expectations and moving that capital to properties with higher growth potential. Other investors have indicated they have significant dry powder capital ready to go and plan to increase their pace of acquisitions this year.
Investors at the National Multifamily Housing Council conference last week indicated there's plentiful debt capital available for commercial real estate, and that lender spreads have been coming in, said Chang. While many believe underlying rates like the 10-year treasury will be range-bound this year, the rates charged by lenders may come down a bit.
Borrowing rates on multifamily properties are currently in the low 6% range depending on asset quality and location and loan terms, among other things. Meanwhile, borrowing rates on other commercial property types are running a bit higher. At those levels, many of the assets being targeted by investors may face negative leverage with going-in cap rates below the cost of debt capital in the fourth quarter, said Chang.
“That said, several investors indicated short-term negative leverage would be okay, as long as they can see a path to increasing profitability,” said Chang. “To me, this sounds a lot like how real estate investing used to be, where investors find assets with upside potential, where they roll up their sleeves and create value through upgrades, better management or some other strategy, and in my opinion, that'll be good for the industry.”
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
