Inflation, rising interest rates, and hikes are at the center of the American economic conversation at the moment. And it is for a good reason because any time the Fed raises interest rates, people are uncertain about how the housing market will be affected. This article will be discussing the latest interest rate hike impact on real estate investing.
Everyone is uncertain about the economy’s future as inflation continues to soar. While the Fed continues to raise rates to restore the balance of supply and demand, many potential home buyers aren’t sure what to do.
Interest rate hikes are intended to slow down the housing market, which has catapulted itself to new heights over the past few years. The goal of the rate hikes has been to restore the supply and demand balance. However, we must pay attention to see what would happen if both supply and demand plunged simultaneously.
Since the end of its March meeting, the Fed announced a one-quarter point increase in its federal funds’ rate. The Fed has been raising interest rates since March 2022, when they finally had to concede that inflation was no longer transitory. When the cost of borrowing money goes up, mortgage rates are impacted. It was the Fed’s first increase since 2018. The central bank had slashed rates to zero at the start of the pandemic. The Fed has even hinted at interest rates reaching 4.6% in 2023.
The first two rate hikes took place in March and May which was followed by the largest federal funds rate hike since 1994, in June. Since then there was another three-quarter percentage point rate hike in July, one on September 21st another 75 basis points increase, and most recently the November rate hike was the sixth of what could be seven bumps in 2022.
Now, what does this mean for you as a real estate investor?
Negative economic growth in the first two quarters of 2022, a volatile stock market, apartment dwellers stressed about inflation, and interest rate hikes from the Federal Reserve are enough to make developers and investors in the multifamily segment of a commercial real estate feel more than a little anxious.
Multifamily apartments have been on a roller coaster over the last few years. From rent declines in key markets during the early days of the pandemic followed by rent growth across the board from a variety of factors, the sector is now dealing with slowing economic growth and further interest rate hikes.
Multifamily is a very resilient sector in the U.S. Even as interest rates rise and inflation pressures deal, the multifamily apartment sector remains strong, with occupancy rates remaining high and rents staying relatively solid. The underlying multifamily fundamentals are still good. Though rent increases are expected to moderate, overall demand for housing is robust. A lack of affordable housing will also continue to drive demand in that space, and higher mortgage rates and lack of affordability in single-family will benefit multifamily.
Overall, supply and demand for the asset class remain out of balance; asking rents for existing units are up 12.6% year-over-year through July, and the US is currently estimated to be at a 600,000-unit apartment shortage, according to the National Multifamily Housing Council and the National Apartment Association. Yardi Matrix data shows that occupancy sits at around 96% nationally as of June 2022.
How does the forecast look for earnings growth in the multifamily sector?
Quite positive. As discussed earlier, multifamily fundamentals are strong. Demand drivers include a healthy labor market and rebounding household formations. As a result, vacancy rates are near cyclical lows, renters are actively leasing apartments, and operators are implementing robust rent increases. Plus, many would-be homebuyers are priced out of the market and rising mortgage rates are making homeownership even less affordable, creating greater demand for multifamily apartment housing.
Will inflation eat into the multifamily sector’s earnings growth?
Not likely. In fact, multifamily real estate is particularly well-positioned to succeed in an environment of rising inflation. Apartments traditionally have short-term leases, often with one-year initial terms which then reset monthly. As such, leases can be frequently repriced to reflect inflation and capitalize on increased demand. It’s also important to note that the Fed is hiking rates in response to inflation.
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Will inflation eat into the multifamily sector’s earnings growth?
Not likely. In fact, multifamily real estate is particularly well-positioned to succeed in an environment of rising inflation. Apartments traditionally have short-term leases, often with one-year initial terms which then reset monthly. As such, leases can be frequently repriced to reflect inflation and capitalize on increased demand. It’s also important to note that the Fed is hiking rates in response to inflation.
How does an interest rate hike affect apartment investing?
An interest rate hike can affect apartment investing in both positive and negative ways. On the one hand, it may lead to an increase in demand for rental properties and higher rental income. On the other hand, it can also make it more difficult for potential buyers to obtain mortgages, leading to a slowdown in the housing market and decreased property values.
