Recent Rate Cut Brings Good and Bad News for Multifamily Market
- Mar 19, 2008
By Anuradha Kher, Online News EditorWashington, D.C.–This week’s fed rate cut could drive up lending in the multifamily market in the short term, but could push it down over the long haul due to an increase in the cost of borrowing.For the second time this year, the Federal Reserve has cut the federal funds rate by three-quarters of a percentage point. This brings the rate down to 2.25 percent. As recently as last September, the rate was 5.25 percent “The rate cut will most likely not impact non-recourse permanent financing for multifamily,” Martin Kamm, managing director of Real Estate Investment Banking for Jones Lang LaSalle, tells MHN. “This is because approximately 70 to 80 percent of it is provided by Fannie and Freddie in the current market.“In the short term, the fed rate cut increases liquidity by reducing the cost of funds for lenders. In the mid-term, with capital markets near their bottom and lenders finding relative value in making direct loans, liquidity to borrowers will begin to increase more substantially,” says Kamm.At the property level, other than in Las Vegas and south Florida., multifamily rental demand is beginning to influence more investors to view the sector as attractive. “Capital market anxiety has made it more difficult for individuals to get loans for buying homes. These people are driven toward rental options as their only viable alternative. This increase in demand for rentals will drive up occupancy and rents, making the sector more attractive to lenders,” according to Kamm.However, on the negative side, “if increasing liquidity in the market drives inflationary expectations upward, there may be a resulting increase in the long-term cost of borrowing,” Kamm concludes.