Rising Interest Rates: A Blessing in Disguise?

MIAMI—With multifamily being the commercial real estate darling that it is, there's been some talk about possible overbuilding. At the same time, interest rates are rising and there's been some instability in the commercial real estate and financial markets.

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 and click here to read part two of this exclusive interview.

GlobeSt.com: Could a slowdown in multifamily development actually be a good thing, to prevent an oversupply of units?

Barganier: Yes, it could yet be a good thing. But if any oversupply occurs, it will be short-lived.

We expect there will be softening in renter demand in A product over the next several years, with nominal effective rental increases in the 1.5% to 2.5% range. However, based upon projections for population and job growth in major metropolitan areas, the markets should again tighten in 2016 and for the foreseeable future. If you believe in real estate cycles, 2016 should be the beginning of a decade of growth in the U.S. economy lasting through 2026.

GlobeSt.com: What are some key things for multifamily buyers and sellers to be thinking about right now in this environment?

Barganier: Based on the recent instability in the commercial real estate and financial markets and the softening in rental increases, many potential multifamily sellers are taking a “wait and see” view. But by the time they see the writing on the wall, it will be too late to salvage prior value expectations.

We believe that purchase or going-in cap rates will adjust upward 50 basis points or more following the rise in Treasury rates over the next two years, and then adjust downward again as market equilibrium is again reached after 2015.

By contrast, purchase cap rates and interest rates are low, so now is a really good time to buy or sell apartments. It makes sense for both sides.

Stone: We are tracking numerous properties that should have come to market last year or the first part of this year. For many sellers, they have already given up ground on price, so the only question is whether they will give up more ground.