Rising Interest Rates Slowing Multifamily Activity

MIAMI—Multifamily is still the darling of commercial real estate. But could rising interest rates throw wet water on the recovery?

GlobeSt.com 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 interest rates. Barganier and Stone recently produced a report on “Rising Interest Rates and Multifamily Values. Click here to read part one of this exclusive interview.

GlobeSt.com: Is there a certain level for rates that could lead to a significant slowdown in multifamily activity?

Barganier: It's already starting to happen. Investors' concerns about the impact of rising interest rates on commercial real estate are understandable, and in the near term some disruptions in the transaction market are likely as rates move higher.

However, history suggests it would be a mistake to interpret near-term volatility as an ominous sign for real estate investment. Real estate performance is largely determined by the availability of capital and by the level of demand. Barring a contraction in the U.S. economy, continued strong demand should have a positive effect on property performance in the next up-cycle.

Catalysts for higher rates are positive factors, such as a more robust economy and increased appetite for risk. The flight to investment real estate by local and especially international investors has not ended, nor has real estate risk been re-priced in any significant form.

Over the past six years, the average spread between cap rates and Treasury rates has been approximately 370 basis points. Against a backdrop of improving fundamentals and the threat of inflation, real estate should remain relatively attractive and we are hopeful this spread will reduce to a more normal 200 basis points.

Stone: Development activity follows the flow of capital and the condition of the overall economy. It will find its equilibrium, just as it has historically.

GlobeSt.com: In general, how would you characterize multifamily sales and development activity in Florida, and how does it compare to, say, six months or a year ago?

Barganier: I would characterize it as robust, since new development activity is currently at an eight-year high and sales volume activity in the second quarter was at a two-year high.

Naturally, many pipeline deals will be completed, but we anticipate activity in the volume of both sales and development starts to slow in 2014 and 2015, based solely on investor fear. I see this as a period of opportunity for the smart developer and investor, before stability returns to the market.

Stone: All factors point to a slowdown as all parties come to grips with the new normal.  Funny how history repeats itself.

Come back for part three of this exclusive interview in tomorrow's Miami edition.