In the spring of 2022, the Federal Reserve began to raise interest rates at a historically rapid pace in order to combat 40 year high inflation. This sent a shock through both the residential and commercial real estate sectors as new home buyers grappled with all time high mortgage rates and investors with floating debt unexpectedly high interest costs. Now that rates are mostly stable, would be buyers and sellers are trying to bridge the gap on pricing expectations in a market with very low transaction volume. The question remains though, when will the Fed begin to lower the interest rates. While no one knows a definite answer, here are a few thoughts that might inform your opinion of this topic.
If you look at the a 30 year historical chart of interest rates, you will notice a few interesting things. First, that the increases from the FED over the past year have been of historical rate and magnitude. This is why is has been so difficult for the market to adjust because the increase has been both large and rapid. The second thing you will notice is that the decreases have tended to be more rapid than the increases. The Fed will often slash rates in response to an economy that is entering a recession or seeing high rates of unemployment. The final observation which is perhaps the most important in responding to your question is that the longest time that the Fed has maintained high rates is around 18 months with the average time being well under a year. This means, that if the Fed following historical trends that they will likely being lowering rates in the 9-18 month time frame after they stop rate hikes.
For current owners, this means that the ability to hold properties until 2025 is key in order to be able to sell for top dollar or refinance into a loan that won't eat all of the cash flow in interest. For potential buyers, this means that the next 6-18 months will be a prime opportunity to buy distressed assets which will trade at a relatively high cap rate. Even if purchasing these assets requires using debt at a higher interest rate, as long as there is flexibility in the exit timing investors should see solid returns on these investments. Of course in the meantime, many investors are also finding success by purchasing deals with an available loan assumption where the lower interest rate allows for positive leverage going in on the deal.
There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily, please check out our free ebook "Achieving Financial Freedom Through Multifamily Investing."