The U.S. economy remains on very shaky ground as the Fed continues to tighten monetary policy quickly. Last week, the Fed increased interest rates 75 basis points, the largest single increase since 1994. As the central bank tries to curtail inflation, the multifamily industry is beginning to feel the effects of higher interest rates. Multifamily mortgage rates have increased significantly over the past 6 months, and borrowing costs now exceed cap rates for many deals. As a result, properties are staying on the market for longer, trading at lower prices, or being pulled off the market all together.
At the recent Commercial Real Estate Finance Council meeting the tone among lenders was far more subdued than it has been in years. Deals are harder to pencil not only because of the rising rates, but the uncertainty of how far and how quickly rates will continue to increase. The Fed has made it clear that they will raise interest rates quickly and steadily until inflation is under control. I expect transaction volume to drop meaningfully compared to record highs seen in recent years, however investment activity won’t completely dry up, as multifamily has proven its recession resistant nature.
Despite the slowdown in multifamily investment, operating fundamentals continue to perform well. NER increased another 20 basis points and crossed $1,900 nationwide last week. Year-over-year rent growth continues to decelerate and will likely fall into single digits for the first time since early 2021 in the coming weeks. Traffic and leasing are falling as we near the end of the prime rental season, while occupancy and leased percentages remain mostly flat.
Key Takeaways – Data as of 6/19/2022
Traffic and Leases:
Occupancy and Leased Percentage:
Net Effective Rent:
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