The Federal Reserve cut interest rates 25 basis points on Thursday, marking the second cut in two months to bring the benchmark federal funds rate to between 4.5% and 4.75%.
Multifamily executives welcomed the Fed’s actions. However, apartment buyers also like certainty, and in this moment of volatility, with a new presidential administration arriving in two months, that’s hard to come by.
“With ambiguity around rates and how quickly cuts may come, some investors are sitting on the sidelines,” said Brad Feldman, senior managing partner of Chicago-based brokerage firm Interra Realty.
The September interest rate cuts didn’t lead to a reduction in a key measure for sizing multifamily loans, which further clouded the picture. In fact, the 10-year Treasury rose in the weeks before the presidential election and jumped from 4.28 before the race on Tuesday was called to 4.47 on Wednesday.
“Treasuries have already spiked in the short time since election results came in,” Feldman said. “Lower interest rates will encourage further investment but the ‘higher for longer’ [environment] will likely be here to stay until inflation cools enough.”
Feldman said the market “has ebbed and flowed” as loans matured and interest rates moved. “I’d expect additional cuts will spur activity, though there are a lot of factors involved,” he said.
Trevor Ryan, the chief financial officer of Naperville, Illinois-based apartment owner, manager and operator Marquette Cos., also noted that the 10-year Treasury jumped after the September announcement.
“Treasuries were already up just over 50 basis points from the recent bottom in September, before election week, which I think is already a surprise to most,” Ryan said. “Then, on Wednesday, the stock market had its best post-election day rally in history and treasuries climbed higher.”
A market stimulus
Still, Brad Case, the chief economist at Tysons Corner, Virginia-based apartment owner and operator Middleburg Communities, expects today’s rate cut will provide further stimulus.
“The rate reduction would attract more attention and would, therefore, likely boost asset values [especially in the stock market] by reducing the discount rate applied to future net cash flows,” he said.
Ryan thinks it would take the Fed pushing target rates down another 100 basis points or more to help owners refinance or exit the properties that were purchased at the peak with floating rate loans and higher leverage. “A slightly lower-rate environment would also drive more transaction volume toward traditional levels,” he said.
Without a massive rate cut to stabilize the market, buying opportunities will persist from sellers motivated by loan maturation, partnership, recapitalizing and other factors.
“This has allowed many buyers to find value in the opportunities they are pursuing,” Feldman said. “Meanwhile, pricing continues to stay strong thanks to robust rents and continued demand.”
While welcomed by apartment investors, Case said the rate cut won’t fix the biggest issue — supply. “When the Fed reduces interest rates, that doesn’t direct new construction to places where supply is most needed; rather, it boosts new construction in places where regulatory approval is easiest to obtain,” Case said.
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