New Fed Rate Cut Adds Balance to Mixed Outlook

With the central bank lowering its benchmark close to zero, multifamily enters a new late-cycle chapter.
Image via Pixabay.com

On Sunday, the Federal Reserve announced a 100-basis-point drop of its benchmark interest rate, bringing it down to a range of 0 to 0.25 percent. The emergency adjustment comes amid growing concerns of what the coronavirus pandemic could mean for the economy. This shift marks the second time the rate has fallen to these historically low levels—the only other instance being during the 2008 financial crisis.

Lending terms had already become increasingly attractive following the previous cut, on March 3. The new range could spell a “borrower frenzy” in terms of Fannie Mae and Freddie Mac loans. Both entities are limited to a maximum of $100 billion in multifamily loan acquisitions through the end of this year’s fourth quarter, and an even greater spike in new originations could rapidly move both GSEs toward that ceiling. Meanwhile, single-family homes are recording elevated loan activity, as mortgage rates plummet to 50-year lows, according to MarketWatch.

Safe haven?

While other asset classes—notably hospitality and industrial—are already being impacted by the rapid spread of COVID-19, multifamily investment may be in a stronger position for the long haul, with overall fundamentals prepared to withstand a mild recession.

Nonetheless, the latest economic developments paint a complex yet stable picture, including a fair share of short-term headwinds for the rental sector. Construction costs remain at record highs, and newly delivered communities may endure significant challenges leasing up. Additionally, student housing could prove a tricky investment, with a growing number of universities shutting down campuses and shifting to online class formats due to the pandemic.