What the Fed's Rate Hike Actually Means for Multifamily Investors
The Fed just raised interest rates for the first time in 1,148 days. What does that actually mean for multifamily investors?
In this episode, I break down what the Fed’s latest rate hike means for multifamily real estate and why investors should be paying attention to more than just the Fed funds rate. I explain the difference between the Fed funds rate, SOFR, and the 10 year Treasury, and why the 10 year Treasury is especially important when it comes to commercial real estate debt.
I also break down how higher interest rates have affected multifamily valuations, why buildings that traded at aggressive prices in 2021 and 2022 are now selling at significant discounts, and the relationship between interest rates and cap rates. We look at why cap rates can lag changes in interest rates and how rent growth, financing costs, and investor expectations all influence property values.
What I Cover
What actually happened when the Fed raised rates for the first time in over three years
The difference between the Fed funds rate, SOFR, and the 10 year treasury
How interest rates affect multifamily debt and property values
Why low interest rates drove multifamily valuations higher
How floating rate debt contributed to today's distress
The relationship between interest rates and cap rates
Why cap rates lag changes in interest rates
How rent growth affects property valuations
Why today's market may create opportunities for disciplined buyers
How Apogee Capital underwrites multifamily deals in a higher rate environment
Why positive leverage and conservative assumptions are critical
Key Takeaways
The Fed only directly controls the Fed funds rate, the 10-year Treasury is set by the bond market based on inflation expectations and risk
Floating rate bridge loans are priced off SOFR, which moves in near lockstep with the Fed funds rate
Cap rates and interest rates are not directly correlated, but they are tied together through cost of capital, a lag effect, and rent growth expectations
A property can lose 40 percent or more of its value when cap rates rise even if nothing about the actual asset changes
The best buying opportunities in real estate history often happen during high rate periods because that's when competition disappears
Resources
Join my Multifamily Advisory Conference: https://www.eventbrite.com/e/multifamily-advisory-conference-tickets-1998949811697
Mentorship Program 1:1 coaching for active multifamily investors.
Mastermind Program For serious multifamily investors building their skills, network, and relationships.
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