The Fed May Cut Interest Rates Again This Week. Then What?

There’s more than one consequential event on the calendar this week. Veering from its typical Wednesday afternoon schedule, the Federal Reserve is set to release its next interest rate decision on Thursday, just two days after the election.

Reversing the trend of 11 increases from March 2022 to July 2023, in September the central bank cut the benchmark rate to a range of 4.75 to 5 percent. The 50-basis-point reduction was widely seen as a vote of confidence in the economy.

Following the September Federal Open Market Committee meeting, Fed Chair Jerome Powell cited progress on long-term inflation expectations, cooling job gains and other indicators as reasons behind the decision.

Now, some are anticipating a 25-basis-point decrease for the Fed’s November meeting. But not all multifamily executives expect this outcome, and not everyone agrees on its impact.

Multifamily’s guarded optimism

McCarley Davis, president of Madison Communities, told Multi-Housing News that September’s rate cut provided some short-lived optimism for multifamily due to its relatively small effect on fundamentals.

“The 10-year retreated to sub-4 percent levels, which provided some positive momentum on the valuation side, i.e., cap rate compression, positive leverage for buyers,” Davis said.

Since then, however, that number has been on the rise and now stands at 4.31 percent, the highest level since July. “This move upward has caused that early optimism to dissipate,” he added.

But in the view of other observers, multifamily has continued to show strong fundamentals throughout this economic downturn, and following recent rate pauses and cuts, transaction activity has increased.

“We are guardedly optimistic about the impact of future rate cuts freeing additional capital and moving both lenders and buyers off the sidelines,” said Yisroel Berg, chief information officer of multifamily at Harbor Group International. “It has emboldened some capital to believe we are in a declining rate environment.”

Still, money remains on the sidelines. Brad Siegal, shareholder and member of the real estate practice group, Buchalter’s Nashville office, told MHN that some of this capital is waiting to confirm that rates will continue to fall, as the finance and investment community waits out election results. In the Southeast, at least, little has changed since the first rate cut, according to Siegal.

“Projects that are underway are still proceeding but new ‘out of the ground’ developments didn’t see much, if any, of an uptick,” he said. “Acquisitions and dispositions were similar in that not much ‘new’ activity developed with this, but my view is this was driven by mainly waiting for the election to complete.”

The impact of more cuts

The Fed’s decisions on short-term rates don’t generally correlate directly to multifamily activity, observed Henry Manoucheri, CEO of Universe Holdings. Yet the factors prompting the Fed to change short-term rates do impact on the 5-year and 10-year rates, which have a more immediate influence.

“One way in which they do have more of a direct impact on the multifamily business is in investment decisions,” Manoucheri noted. “It is much more difficult to get investors to invest in a deal that will yield 4.5 percent when they can currently earn 5 percent in the bank guaranteed.”

Davis speculated that the Fed would hold off on further cuts until December, considering that this week’s meeting is so close to the election. But whenever the move comes, it can have an immediate impact on development, he noted.

“Interest expense during the construction period is a capitalized cost and it is directly tied to the levels of short-term rates,” Davis said. “All other things being equal, this lower cost will have a positive impact on underwriting.”

And as Siegal pointed out, lower rates help get ground-up deals moving and stimulate investment activity. “For deals that need to sell, they happen anyway, but for deals not ready to be on the market, cuts will assist in making that happen quicker,” he said.

Whit Huffman, co-CEO of Capital Square, also believes that rate cuts could boost transaction volume. “If future rate cuts are projected, and the Fed executes on these cuts,” he said, “this will likely bring more willing buyers and sellers into the market, enhancing confidence and creating a more active environment.”

Should the Fed continue to lower interest rates, Berg predicted that multifamily will feel the impact operationally as well as on the capital markets side.

“Rate cuts do have a dramatic impact on multifamily business operations,” he noted. “Owners are currently focused on preserving cash flow at their assets given the run-up in rates.” But should further rate decreases happen, relief will be felt on cash flows as well as additional refinancing potential.

Why this FOMC meeting is different

One factor about the upcoming FOMC meeting that’s piquing interest is the timing two days after the presidential election.

“This will be the first meeting of the year occurring after the election is over, although we may not yet know the outcome of the election when the Fed meets next week,” Manoucheri said. “Generally, though, inflation data has been trending in the right direction and the low unemployment numbers have eased a bit, showing a healthier balance.”

Although the post-election timing of this month’s meeting is significant, Huffman emphasizes that it’s important to also keep in mind the underlying trends.

“We look at other indicators that we believe may be more impactful in the immediate term, such as GDP, the PCE index, the Case-Shiller index and other important indicators,” Huffman said. “The FOMC meeting is important, but we’re interested in other factors as well.”

Another defining characteristic of the Fed meeting, Berg said, is that it could end up with a binary outcome. Further rate decreases could add to recent multifamily momentum, while holding steady might have the effect of blunting that progress.

The 2025 outlook

Despite varying expectations about the outcome of the November Fed meeting, multifamily experts are of the same opinion that transaction volume and project starts should increase sometime in 2025.

Should the Fed implement multiple rate cuts, resulting in a Federal Funds rate of around 3.5 percent, alongside a decrease in long-term rates, Manoucheri anticipates that multifamily should see an uptick in transaction activity. But he noted that the degree of the uptick could be more robust depending upon the election results and the actions of the new administration.

“More importantly, with the election uncertainty out of the way, we expect mortgage spreads to the long term rates to tighten, which would mean lower borrowing costs and should spur activity,” he continued.

Considering the strong demand for housing across the nation, experts anticipate multifamily fundamentals to remain strong. Berg noted that debt maturities could be a catalyst for additional sales. And Davis told MHN that he anticipates starts to increase toward the end of the year while rent growth returns to markets that are experiencing high levels of supply.

Siegal also remains optimistic about 2025, comparing its prospects to those of a hybrid car. “It has been sitting in idle while rates were high and the election finally resolved to a result,” he said. “Now that the election is ending and rates continue to fall, the engine of the car should restart, funds should begin flowing into the market for the purchase and sale of existing units, and for the correct markets, development of new multifamily units should begin in earnest.”