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Interest rates are going up. Here’s what multifamily investors need to know.

By the editorial team at Story by J.P. Morgan

The Federal Reserve is on track to raise interest rates this month in an effort to control inflation, which is the highest it’s been in decades.

What do the central bank’s moves mean for multifamily investors? Jim Glassman, Managing Director and Head Economist for Commercial Banking at JPMorgan Chase, broke down what’s changing and shared five key takeaways:

1. The Fed doesn’t control mortgage rates — but it can affect them

In Mid-March, Federal Reserve officials said they will raise the target range for the federal funds rate, or the interest rate banks charge each other to borrow overnight, to between 0.25% and 0.5%. That’s a 25 basis point increase, and the central bank said it expects additional rate hikes “will be appropriate.”

The Fed doesn’t set mortgage rates for single- and multifamily properties the way it controls the federal funds rate. However, its monetary policy influences those rates, which tend to rise and fall with yields on 10-year Treasury notes.

During the pandemic, part of the Fed’s strategy for supporting the economy involved buying billions in Treasury securities and mortgage-backed securities each month, which helped keep interest rates down, Glassman says. The Fed began scaling back its purchases last fall and planned to stop buying assets in March, and both 10-year Treasuries yields and mortgage rates are up from pandemic lows, Glassman says. That increases the cost of financing for anyone seeking a loan.

2. While rates are rising, they’re still relatively low

if investors needed interest rates to be zero from fed, then they're in trouble

The Fed’s effort to bring interest rates down during the pandemic was an emergency measure to boost the economy, Glassman says. That means the new, higher rates are a return to normal conditions, not an effort to brake the economy’s expansion.

“Honestly, if [investors] needed interest rates to be zero from the Fed in order to justify these investments, then they’re in trouble,” he says.

While interest rates matter to investors, other factors, like whether their multifamily properties are located in markets that are drawing an influx of new residents, will have a much bigger impact on their success, he says.

3. Opportunities to act on changing rates are limited, but it’s still smart to keep tabs on the market.

The Fed’s effort to bring interest rates down during the pandemic was an emergency measure to boost the economy, Glassman says. That means the new, higher rates are a return to normal conditions, not an effort to brake the economy’s expansion.

“Honestly, if [investors] needed interest rates to be zero from the Fed in order to justify these investments, then they’re in trouble,” he says.

While interest rates matter to iThe Fed has been signaling its plans for a while, so multifamily investors will have a tough time getting ahead of changing rates, Glassman says.

However, investors should still keep an eye on interest rates so their expectations are in line with the market, he says.

Glassman doesn’t expect to see significant additional increases in interest rates beyond a return to a “neutral” level unless inflation turns out to be a much bigger problem than economists expect, forcing the Fed to take more dramatic steps to slow the economy down.

“Right now, the Federal Reserve is only talking about taking their foot off the gas. If they have to start talking about putting their foot on the brakes … you would be thinking differently about how to hedge that,” he says.nvestors, other factors, like whether their multifamily properties are located in markets that are drawing an influx of new residents, will have a much bigger impact on their success, he says.

4. Will higher mortgage rates create more renters? It’s complicated.

i wouldn't be shocked if real estate prices flatten this year

When interest rates rise, it limits the price of the home a prospective buyer can afford. You might think that would lead would-be homebuyers to choose to keep renting, boosting demand for apartments.

However, housing prices tend to react quickly to changes in consumers’ buying power, Glassman says. As mortgage rates dropped during the pandemic, giving people the ability to finance bigger purchases, home prices rose.

With mortgage rates climbing back to pre-pandemic levels, “I wouldn’t be shocked if real estate prices flatten this year, or actually go down,” Glassman says.

Affordability also isn’t the only factor people weigh when choosing to rent or own. Young, single people are more likely to rent than families, and interest rates won’t change that, he says.

5. Leverage good tenants as an asset

Good tenants who have a consistent track record of paying rent and renewing leases can be a selling point for investors.

“In most cases, you're better off being fully leased, or at least leased to the market occupancy,” Tenret says. “The only time people really want vacancies is if they're planning to do a complete gut rehab and reposition the building.”

According to Tenret, your most recent leases will be your property’s best rent comps. So, ideally those numbers should be on the high end or slightly above market. If your units are currently leasing on the low side, you can consider offering concessions to your tenants, such as a free month’s rent or an improvement allowance, to help offset a monthly rent increase, which in turn could give you a more attractive lease rate.

To minimize the impact of a sale on your existing tenants, Tenret recommends specifying in your contract that the owner retains the right to make decisions for the property up until the closing date.

“It’s important that potential buyers are not talking to your tenants without you,” Tenret says. “[Your broker] should coordinate any property tours, tenant interviews or lease estoppel requests. This allows you to hear directly from the tenants and provide context for any concerning feedback.”

6. The impact on multifamily property prices is tough to predict

Rising mortgage rates make it more expensive to finance properties, which seems like a challenge for investors.

But rates aren’t rising in a vacuum — they’re going up because the U.S. is working its way out of the pandemic, wages are rising and the economy is doing well, Glassman says. With all those forces in play, it’s tougher to predict how prices will respond.

“Everything’s getting better, and honestly, I’ll bet that an investor in multifamily would much rather have a healthy economy and high interest rates than a poorly performing economy and low interest rates,” he says.

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