Interest Rate Increases May Affect MF Acquisitions

NEW YORK CITY–What will it take to for the seemingly indefatigable multifamily asset class to lose steam/? Slowing rent growth in many markets due to high supply hasn’t had much of an impact so far this year. According to Real Capital Analytics, multifamily sales volume for the first half of 2018 was $69.8 billion, a 7.7% year-over-year increase. Meanwhile, some $250 billion has been earmarked for continued investment in the sector, according to an Real Capital Markets survey.

But while the asset class is navigating shifting supply-demand fundamentals with ease, a new challenge is looming that could prove to be harder to overcome: interest rate increases. Real Capital Markets’ “Multifamily Investor Sentiment Report” says that nearly 70% of survey respondents said that the prospect of further increases is having and will have an impact on acquisition strategies.

Interest rates have moved up about 60 basis points over the past year and are edging close to 5%, according to Vic Clark, senior managing director for Hunt Real Estate Capital, who was quoted in the report. In response, lending agencies have found ways to reduce pricing to keep rates low despite the interest rate hikes, he says. However, he adds, “another 60 basis point rate hike will be difficult to absorb.”

Additional rate hikes could be felt in a number of ways, chief among them more cautious underwriting and pro-forma approaches. Another possibility is that investors could shift their strategies in response to lower yields, the report said, such as moving into value-add properties. But that option is limited as the investment segment is overpriced and saturated with investors.

Much will depend on what happens with rental rate increases. Some of the respondents told Real Capital Markets that if rental rates increased between 2 and 2.5% annually, which is more than expected right now, that would cancel out the effect of additional interest rate increases.

The Fed’s Trajectory

After two rate increases in the first half of the year, Federal Open Market Committee meeting officials voted to keep interest rates unchanged, at a range of 1.75 to 2% at the last meeting. However the statement officials released indicates that a rate increase is coming next month and then again in December. They noted that “further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions and inflation near the committee’s symmetric 2% objective over the medium term.”