Rent and Operating Trends Week of August 28th

While the fundamental underpinnings of the U.S. economy did not change as the result of last week’s speech from Fed Chair Jerome Powell, the remarks, and the stern and straightforward tone with which he delivered them indicates that the economy is likely in for a challenging slog. Contrary to typical Jackson Hole Economic Symposium speeches, where Fed Chair’s often discuss at lengths the different aspects of the economy, Powell’s talk was brief and only focused on the Fed’s role in reducing inflation. He laid out a course of action that will likely result in continued steep interest rate increases, and he acknowledged the need for the Fed to raise rates well above what they see as a neutral level. Powell indicated that economic activity, including employment growth may suffer as a result, but that a return to a normal inflationary environment was not only the Fed’s number one priority, but also a necessity to restabilize the economy.

Specific to multifamily, I view the Fed’s rapid tightening of monetary policy to have the most direct impact on the transaction market, although a generally slowing economy will also have an impact on operating fundamentals. As short-term interest rates rise rapidly, the interest expense on floating rate and bridge loans are killing deals nationwide. Buyers and sellers remain far apart on fair market value of assets and as a result fewer apartment trades are closing. The impact of interest rates is felt most significantly on value-add projects and on smaller investors who may not have the ample capital of major institutions. Even so, deals are falling apart in all investment categories and with all levels of multifamily investor. Operating fundamentals remain steady, however recent modest declines will likely continue at least through the beginning of next year.