Key takeaways:
- The Federal Reserve has raised interest rates 11 times since March 2022 and signaled rates could remain elevated longer than previously expected.
- Apartment market fundamentals position multifamily investors to succeed amid economic uncertainty.
- Multifamily investors can take key steps to protect their portfolios, including planning ahead to capitalize on rate changes, managing operating expenses and avoiding excess debt.
The Federal Reserve has been raising its key interest rate since March 2022 in an effort to control inflation. What does this mean for multifamily real estate investors? Here’s what to know, plus ways to prepare for uncertainty.
What’s next for interest rates?
The Fed began raising the target federal funds rate, or the interest rate banks charge each other to borrow overnight, at the March 2022 Federal Open Market Committee meeting. At the most recent one on Sept. 20, 2023, the FOMC decided to hold the target range steady at 5.25% to 5.5%.
Quarterly economic projections the Fed released at that meeting imply there may be an additional 0.25% rate hike by the end of 2023. Those projections also show rates falling 0.5% from the end of 2023 to the end of 2024 — a smaller drop than the 1% decline forecast in June.
The FOMC will take a “meeting by meeting” approach to decisions about future rate changes, Fed Chair Jerome Powell said at a news conference after the September meeting.
“Inflation has moderated somewhat since the middle of last year. … Nevertheless, the process of getting inflation sustainably down to 2% has a long way to go,” Powell said.
How do the Fed’s actions affect mortgage rates?
While the Fed controls the federal funds rate, it doesn’t set mortgage rates for single- and multifamily properties. However, its monetary policy influences those rates, which tend to rise and fall with Treasury yields.
“The relationship between Treasury yield movements and mortgage rates is not necessarily one for one,” but there is a strong correlation, said Mike Kraft, Commercial Real Estate Treasurer for Commercial Banking at JPMorgan Chase, speaking with JPMorgan Chase’s Commercial Banking Insights.
Uncertainty about where interest rates, inflation and the economy are heading can be challenging, but well-prepared investors can still take advantage of the multifamily market’s strong fundamentals.
3 ways multifamily investors can manage high interest rates and economic uncertainty
1. Plan ahead when purchasing or refinancing real estate.
Interest rates have been volatile, and that’s likely to continue, Kraft said. That means it’s smart to plan ahead if you’re considering purchasing or refinancing a multifamily property and can be flexible with your timing.
“By preparing in advance, you can act on short notice and take advantage of dips in rates as they occur,” he said.
In addition, consider factors beyond interest rates that can be key to success, like whether the property is in a market attracting new residents with plenty of demand for housing.
2. Keep an eye on multifamily operating costs.
Inflation has slowed since mid-2022, but it’s still elevated. As such, keep an eye on expenses and pay attention when budgeting. Potential cost-cutting measures in multifamily real estate operations include:
- Conducting energy audits to identify utility savings
- Enlisting expert help with tax appeals
- Grouping construction and renovation projects to bring down expenses related to materials and supplies
- Curbing tenant turnover
3. Prepare to ride the market’s ups and downs.
Avoiding excess debt can protect multifamily investors from being forced to sell in a market slump as well as prepare them to take advantage of deals that might emerge in a downturn, said Al Brooks, Head of JPMorgan Chase Commercial Real Estate. Read more of Brooks’ tips for investing successfully throughout economic cycles.
By Lauren Zumbach from Story by J.P. Morgan
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