UPDATED: Fed Rolls Out Rate Hike No. 10

After this widely expected increase, the industry awaits next steps.

Chairman Powell speaks at the May 3 press briefing. Screenshot of Federal Reserve livestream by Gabriel Frank

In alignment with the majority of expert predictions, the Federal Reserve raised interest rates by 25 basis points on Wednesday afternoon.

The 0.25 percentage point increase is the tenth in a series of rate hikes by the central bank aimed at curbing inflation. Though key metrics show inflation slowing, it persists above the Fed’s goal.

“The Fed’s monetary policy actions are guided by our mandate to promote maximum employment and stable prices for the American people,” Federal Reserve Chairman Jerome Powell said during his press conference on Wednesday.

This rate hike brings the target interest rate range from 5 percent to 5.25 percent, the highest it has been in more than 15 years. Amid real estate market volatility, bank failures, cap rate changes and a bid-ask spread, many were hoping the central bank would pause further hikes. However, most multifamily experts predicted this outcome.

Consensus prevails

To fully execute the task of bringing down inflation, many suggested that another rate hike was in order. However, with signs of cooling inflation as well as recent bank failures, others signaled it was time to stop. Before the final Fed decision was released, multifamily experts told Multi-Housing News of their expectations.

“During prior months, the Fed has done a good job of setting the market’s expectations prior to announcing their rate hikes and delivering in sync with those expectations,” Diego Bonet, managing partner at LD&D, told MHN earlier this week. As the market was pricing this rate hike, he anticipated a 25-basis-point rate hike.

Morris Kaplan, president of Kaplan Residential, reached the same conclusion, expecting a quarter percent increase. “That is because right now, the volatility of the market has slowed down and inflation is going in a positive direction,” Kaplan explained. “Hopefully, we can avoid a hard crash and get closer to the target inflation rates.”

With strong certainty, Henry Manoucheri, CEO and Chairman of Universe Holdings, also agreed. “The employment numbers have come in strong and the GDP has grown in the last quarter by 1.1 percent,” he said. “This gives the Fed enough ammunition to continue their fight against inflation.”

Following Wednesday’s decision, Manoucheri highly doubts interest rates will continue to increase. This opinion is shared amongst most of the industry, considering no significant external impacts come into play.

“The market is pricing no more hikes for this year and cuts starting in the second half of the year,” said Bonet. “We don’t believe there will be additional rate hikes after the one from this meeting, but we also believe that rates may remain ‘higher for longer’ and expected cuts later this year may not materialize as the market is pricing.”

As for further interest rates, Powell said during the conference: “Looking ahead we will take a data dependent approach in determining if additional policy affirming may be appropriate.” He continued that inflation remains far above the Central Bank’s longer run goal and future decisions will be made on a meeting-by-meeting basis.

How this hike will influence multifamily

The multifamily market is already feeling the impacts of previous rate hikes. Acquiring the right financing and getting projects off of the ground has been much more difficult than in the couple of years past. The impacts of this rate hike will snowball on what the industry is already seeing.

“A rate hike above what the market is pricing would potentially create more uncertainty and cause investors to remain on the sidelines,” Bonet said before the meeting. “A pause in hikes or a dovish message from the Fed could incentivize investors to re-enter the market.”

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Kaplan predicts the impact of this week’s meeting and a 25-basis-point increase will not be significant, as multifamily is already feeling the central bank’s previous decisions. On the contrary, multifamily could have benefited from a pause.

“A lot of equity and debt groups are sitting on the sidelines because of uncertainty,” Kaplan told CPE.  “Should the Fed choose to pause, it would help restore confidence, and push debt and equity groups back into the marketplace. Cost to build is still a challenge, but if banks are willing to look at deals knowing that they are prepared to lend, it could open the market.”

Buyers may have returned to the multifamily market should the Fed have paused. Now, however, this increase will likely cause borrowers with variable rate debt to be further squeezed, Manocheri said, adding that the price of cap rates will also increase.

Where the industry is already seeing the effects

The central bank’s previous rate hikes have caused a significant decline in multifamily investment activity. Recently, a Colliers’ Capital Market report stated that multifamily sales volume was down 64 percent in the first quarter of 2023 when compared to the first quarter of 2022. A contributing factor towards this slow is how cap rates follow interest rate and debt expectations, Karlin Conklin, Principal, Co-President & COO, Investors Management Group, told MHN.

“As interest rates rise, cap rates rise, and given the inverse relationship of cap rates to values, higher cap rates translate into lower values and pricing,” she said. “Sellers are reeling at the loss in values right now, particularly if they purchased in the last several years when deals traded at cap rates in the low 4s for desirable, top-tier markets. Those same deals would be underwritten today in the high 4 percent to low 5 percent range.”

These higher cap rates result in a 12 percent to 18 percent loss of value causing sellers to hold onto their assets until value recovers, she continued. But its not only sales volume feeling the effects of rising interest rates. Development activity has been severely impacted as capitalizing projects has increased in difficulty leading towards higher rent prices and a worsening housing crisis.

“I estimate that it [the difficulty of acquiring financing] has impacted about 75 percent of projects around the country,” said Kaplan. “The lending landscape is so restrictive that it has pretty much slowed down multifamily to a standstill.”

Higher rate levels, contributing towards overall market uncertainty, has created a serious dwindling of transaction volume in multifamily, Bonet said, in alignment with the other expert opinions. “There are a lot of well-capitalized investors who need to put capital to work and are looking to re-enter the market once there is more certainty about what the economic path forward may look like,” he explained.

Now, multifamily must wait for debt and equity groups to re-enter the industry and get the transaction ball rolling once more. Opportunities lay ahead.

“We’re clearly at the start of a new cycle and believe property values will find an equilibrium with time,” said Conklin. “Real estate investing is a long game and the fundamentals for multifamily are in place for a recovery.”

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