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Fed Pushes Interest Rates Up by 50 BPS
The Federal Reserve announced an interest rate increase of 0.50% in the ongoing struggle against rising inflation.
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The Federal Reserve’s May meeting has concluded with a few key points of interest for investors — most notably an increase of 50 basis points to interest rates. Federal Reserve Chairman Jerome Powell used the platform to address short-term monetary policy and how the Fed would tackle rising inflation.
The 0.50% raise — the highest single raise since May 2000 — was unanimously approved by the committee as the latest move in the Fed’s ongoing battle against aggressive inflation. Rates were last raised by a quarter of a point in March of this year.
As for future increases, Mr. Powell was firm that rate hikes of 75 basis points were still off the table — calming industry fears, if only by a quarter of a point. Even so, the increase is surely not the last, with inflation reaching its highest point in 40 years.
On another front, the Fed also plans to tactically reduce its $9 trillion asset portfolio along with the rate hike. The two-pronged offensive aims to raise the federal funds target rate range to between 0.75% and 1%.
While Mr. Powell did admit the hardships and uncertainty that the central bank faces regarding the current economic pressures, he showed confidence in the Fed's decision, stating, “The economy is strong and is well-positioned to handle tighter monetary policy.”
How the Rate Hike Affects the Multifamily Sector
While not as drastic as what is expected to occur in the broader commercial real estate market, multifamily lenders have already begun adjusting their product pricing to reflect the raise. Cap rates are expected to continue their downward trend with the rate increase, though some feel stabilization is near.
All things considered, industry leaders are not fearful of the coming rate hikes. The 2022 outlook from Freddie Mac®, for example, predicts that rent growth will outpace inflation in the majority of metro markets. Faith in the sector is further backed by historically high occupancy rates and record transaction volume.
Related Questions
What are the implications of the Federal Reserve raising interest rates by 50 basis points?
The Federal Reserve raising interest rates by 50 basis points will lead to higher lending costs in the commercial real estate realm. Many lenders had already priced the higher interest rates in during the days leading up to the announcement. Cap rates for multifamily real estate will also likely remain heading downward, though some markets with projected rent growth deceleration may see an increase.
In the multifamily sector, lenders have already begun adjusting their product pricing to reflect the raise. Cap rates are expected to continue their downward trend with the rate increase, though some feel stabilization is near.
The 2022 outlook from Freddie Mac® predicts that rent growth will outpace inflation in the majority of metro markets. Faith in the sector is further backed by historically high occupancy rates and record transaction volume.
How will the increase in interest rates affect multifamily financing?
The increase in interest rates will likely lead to higher costs of debt capital, tighter underwriting, and buyers pulling out of deals. According to Multi-Housing News, stabilized properties will continue to trade, however, whether deals materialize will depend on the investors’ strategies. Transitional assets, those with value-add opportunities, could also withstand market volatility if investment strategies are executed right. Overall, both investors and lenders will likely flock toward multifamily assets during this uncertain period in search of stability.
What strategies can multifamily investors use to mitigate the impact of higher interest rates?
Multifamily investors can mitigate the impact of higher interest rates by refinancing their property to obtain lower interest rates. This can help free up cash to renovate the asset, increasing its value, and can also help investors obtain lower interest rates. Multi-Housing News noted that stabilized properties will continue to trade, however, whether deals materialize will depend on the investors’ strategies. Additionally, refinancing a property can help investors obtain lower interest rates, which is especially advantageous during volatile economic conditions.
What are the benefits of floating rate multifamily financing?
The benefits of Freddie Mac Floating-Rate Financing for Multifamily Properties include:
- Low interest rates
- Flexible and affordable adjustable-rate financing
- Minimum loan amount of $5 million (though smaller loans can be considered)
- LTVs of up 80%
- 5, 7, and 10 year loan terms with amortizations of up to 30 years
- Non-recourse
- Permit eligible mixed-use properties
- Allow for both the purchase and refinancing of multifamily properties
For more information, please see Freddie Mac Floating-Rate Financing for Multifamily Properties or download our easy-to-understand Freddie Mac Floating-Rate Loan term sheet.
How can multifamily investors take advantage of the current interest rate environment?
Multifamily investors can take advantage of the current interest rate environment by taking out loans with lower interest rates. U.S. Treasury rates, including the 10-year and 5-year rates that are the basis for many multifamily loan interest rates, have fallen over the last 12 months. For example, in July 2018, the 10-year UST was 2.95%, while in July 2019, it had fallen to 2.08%. This means that multifamily investors can take out loans with lower interest rates, which can help them save money in the long run. Additionally, the Federal Funds Rate has increased slightly over the same period, going from 1.91% to 2.38%. This indicates that it is an excellent time to invest in apartment properties, as the economy is seemingly doing quite well and the delivery of new units is still high. Multi-Housing News and Multifamily.loans have more information on this topic.
What are the risks associated with rising interest rates for multifamily investors?
Rising interest rates can lead to higher costs of debt capital, tighter underwriting, and buyers pulling out of deals. This can lead to sellers taking their properties off the market, and investors and lenders flocking towards multifamily assets in search of stability. According to Multi-Housing News, stabilized properties will continue to trade, however, whether deals materialize will depend on the investors’ strategies. Transitional assets, those with value-add opportunities, could also withstand market volatility if investment strategies are executed right.
The 2022 outlook from Freddie Mac® predicts that rent growth will outpace inflation in the majority of metro markets, however, investors should be aware of the risks associated with rising interest rates.