Riskier Treasuries Might Send Investors to Top-Quality Multifamily Properties
- Jul 27, 2011
With competing plans in the House and Senate for raising the U.S. debt ceiling as of Wednesday, the warning bells for default are ringing louder than ever. On Tuesday evening, MHN talked with Christian L. Redfearn, associate professor at the USC School of Policy, Planning and Development and member of the Lusk Center for Real Estate, about what the situation might mean for the multifamily housing business.
MHN: If there’s a federal default, or even a near-default, what happens then?
Redfearn: At the risk of sounding like an economist, it isn’t clear yet. There hasn’t been much of a reaction yet. The markets have been acting like the situation is going to be resolved. Maybe that’s because this hasn’t ever happened before. The debt ceiling has been raised in a pro forma way many times without any fanfare–17 of those times during Ronald Reagan’s presidency, I believe. Because we’ve always paid our bills on time, we’ve been an inflation risk, but never a default risk.
MHN: How would it affect the multifamily housing industry?
Redfearn: That isn’t clear yet, either. Investors have been turning to multifamily to get a better yield than Treasuries. The question is, will the spread between the two change? The cost of Treasuries has to rise. But will the cost of all debt rise as a result, keeping the spread about the same, or will the market perceive Treasuries as more risky, therefore the spread won’t stay constant and actually shrink? No one knows yet. Right now investors turn to Treasuries for safety. If safety isn’t there quite as much as it used to be, it’s possible that they will turn more to other forms of investment besides Treasuries that have a better risk-return profile.
MHN: Such as multifamily properties.
Redfearn: Yes. It’s possible. Leased-up class A apartment buildings in a supply-constrained market, that is. They are viewed as a comparatively safe source of income, so there could be an influx of investors into those kinds of assets. There’s a lot of capital out there, and if some of it pulls out of Treasuries, where is it going to go? Really good real estate is one possibility.
MHN: What if the interest-rate environment changes–interest rates go up–if there’s some kind of panic?
Redfearn: The fear for all real estate right now is that the cost of borrowing will go up, and thus the cost of leverage, which will mean that values will go down. That won’t be a problem just for real estate, of course. Everyone who borrows money in the U.S. will suffer if there’s a default, or even if the United States isn’t considered a safe haven anymore. That’s a distinct possibility, because right now we’re sending a signal around the world that the U.S. isn’t being run by adults.