Rent and Operating Trends – Week of September 24th 2023

An inverted yield curve, where long term interest rates are higher than short term interest rates, is often a leading indicator for a recession. In late 2022, during the Fed’s aggressive monetary tightening, the yield curve inverted and remains inverted nearly a year later. However, as the Fed has slowed down their interest rate hikes, the 10-year treasury yield has been increasing rapidly. In the past month the 10-year treasury has increased 40 basis points and sits at its highest level since 2007. We have covered the effects of Fed policy quite frequently in these weekly reports, however long-term interest rates have a massive impact on our industry as well. Fixed rate debt for multifamily projects is most likely tied to the 10-year treasury, and the nearly 450% increase in the 10-year treasury over the past three years has made it much more expensive to finance deals. However, home mortgage rates are also tied to the 10-year treasury rate. It has become materially more expensive for would be home buyers to finance homes, and as such, many have remained in the rental market. The Single-Family Rental/Build to Rent sector has been the main beneficiary of this trend, as many older millennials looking to start a family, move to the suburbs and have more space in their homes are being priced out of the for-sale market and into the SFR/BTR sector.

Multifamily fundamentals continue to deteriorate as we close out the third quarter. Occupancy remains negative on an annual basis in all markets tracked by Radix Research. New supply is driving the poor performance, and yet the number of units under construction continues to increase. The U.S. Census Bureau recently reported that housing starts are falling, however delays in delivering new projects have led to a larger construction pipeline compared to last quarter. Apartment performance will remain weak until new development begins to slow.