How Multifamily Pros Will Act When Rates Go Down

With a rate cut a virtual lock-in for Wednesday, markets facing the weekend have guessed 55% to 45% chance that it will be a quarter point over a half point, according to CME FedWatch. Even last Thursday, the odds were stacked more heavily toward the 25-basis-point possibility.

Nothing major had changed. It might be that investors are getting anxious or excited, anticipating a change. In multifamily CRE, though, it’s unclear what the practical implications will be. New construction has been on a tear, hitting historical levels in both 2023 and 2024. The activity has pushed down rent growth and pushed vacancy rates up in some areas, particularly in the Sun Belt — a matter of excess supply in some places where others have excess demand.

Those that have seen more building and increasing supply are being wary. “I think for 99% of all of us out there, a 25bps rate cut won’t make much difference at all except for a few acquisitions of existing properties,” Jeff Klotz, CEO for the Klotz Group of Companies, which focuses on Florida, Georgia, and the Carolinas, told GlobeSt.com. “There are a lot of multifamily developers sitting on land that are ready to break ground, including myself, and we need a whole lot more than just a 25bps rate cut to move the needle much at all, much less make the deals underwrite.”

What might be happening is an emotional lift “because it signals the beginning of a reversal of two plus years of rate hikes and that gives people hope,” Klotz said.

Kristi Nootens, co-head of U.S. real estate investment manager CP Capital, has seen a similar emotional reaction. “For me and my business, I’m excited about it,” she told GlobeSt.com. “I’m just excited to get even 25 basis points now and 50 for the year or 25 for the year. We’ve been saying ‘in the next six months’ for two years now. But I really feel like we’re finally here and things are lining up for a nice new cycle in the coming months.”

Nootens said that while there has been a high run of multifamily construction, it still isn’t enough with an estimated shortage of 4.5 million housing units. “Even with interest rates coming down, it’s not that renters will be able to afford a home.”

As many have told GlobeSt.com over the last two years, the lack of sales has meant no price discovery. “What I want to see is the interest rates come down which will bring buyers of deals like mine back in the market,” Nootens says. “It’s really a cap rate black hole that should be fixed by a decrease in rates. It’s going to take a while to trickle in. We’re going to need some buyers to get back in the market.”