In the final Federal Open Market Committee meeting of 2023, the Federal Reserve once again left interest rates unchanged. The decision to keep the Federal Funds Rate at a range of 5.25 percent to 5.5 percent is the third consecutive meeting that left rates untouched, following a year of steep increases.
Heading into the meeting, inflation continued to show signs of cooling, inching toward the Fed’s goal of 2.0 percent. Further indicating the largely predicted pause was data showing a cooling job market, with unemployment numbers slowly increasing and international conflicts adding to market uncertainty.
Multifamily experts anticipated today’s continued pause, though what is to come in the new year is less clear.
“In light of the uncertainties and risks and how far we have come, the committee is proceeding carefully,” Federal Reserve Chairman Jerome Powell said during the Dec. 13 press briefing. “We will continue to make our decisions meeting by meeting, based on totality of the incoming data and their implications for the outlook for economic activity and inflation, as well as the balance of risks.”
Prior to the pause, multifamily weighed in
The war against inflation has led the Fed down a tumultuous path this year. Entering 2023, the Federal Funds Rate was at a range of 4.25 percent to 4.5 percent. The central bank then instituted rate increases in February, March, May and July.
“Members of the Board of Governors have indicated that they expect higher rates for longer and they are willing to wait to gauge the full economic impact of current rates before altering their policy,” Paula Munger, vice president of research, National Apartment Association, told Multi-Housing News shortly before the Fed’s announcement.
Spencer Gray, CEO of Gray Capital, similarly anticipated the rate pause, due to various metrics, including the Consumer Price Index being only 1 percent above the Fed’s goal. “Assuming the Fed continues their pause, investors are preparing to step back into the market as cap rates are expected to fully top out in 2024, especially when the Fed begins dropping serious hints at lowering rates,” Gray said in the run-up to Wednesday’s announcement.
Moving into 2024, there is optimism in the real estate industry. Multifamily could greatly benefit from an easing of rates.
How the year has impacted multifamily
There are few aspects of the multifamily market left unimpacted as a result of rate hikes. From financing to development to transaction volume, the multifamily markets have seen the increases take a toll. Robert Nelson, president, Nelson Management Group, said that the effects of rate hikes on the multifamily industry this year have been nothing short of “disastrous.”
“Interest rates have eroded property values significantly,” Nelson said. “The ability to refinance has been severely hampered, as well as the ability to invest in capital improvements. Unless something changes for the better, multifamily properties, owners and tenants will continue to suffer.”
Considering the pricing discrepancies that remain between buyers and sellers, as well as the drop in property values, transaction activity has dropped significantly. Further, expanding cap rates continue to contribute toward a sterile deal environment.
“The rate hiking cycle has caused multifamily assets to decline in price anywhere between 15 percent to 30 percent, depending on the market and operational performance at the property,” Gray said.
Beyond lower property values and minimal transactions, acquiring financing for pretty much any aspect of a multifamily community has grown increasingly difficult. “Banks have tightened borrowing standards, making it challenging to finance a variety of transactions, including refinancing,” Munger said. She noted that construction loans have been harder to obtain, as has financing for capital improvements.
Anthony Tiritilli, president of development at Lynd, believes that this year’s rate hikes have accomplished what the Fed intended: to slow new starts. Yet the pressure is being felt on more than just new deals. It is also impacting existing projects and properties.
“The unintended consequence, perhaps, is the impact on all of the existing construction and acquisition projects with variable rate debt and the unforeseen risk that this poses to all involved stakeholders,” Tiritilli told MHN.
Heading into 2024
With one more pause under their belt, many are feeling optimistic about what the new year might hold. This hopefulness is tempered by caution, however. In his Dec. 13 press briefing, Powell noted that the central bank is prepared to move forward with further monetary tightening if necessary. The general consensus, however, is that pauses and eventual rate cuts are on the horizon.
“The 10-year treasury is down more than 80 basis points over the last few months and I think that may be a harbinger of things to come,” Nelson said. “If rates come down just minimally, it doesn’t move the needle for us, although it will stop the bleeding.”
When rates will come down is the question of the new year. Nelson isn’t sure that rate cuts will ensue to a meaningful level for the next couple of years. Tiritilli expects to start seeing some decline in rates in the first half of 2024, given a slowing economy, an election year and lower than expected employment numbers. “There’s only one plausible direction to go and that’s down,” Tiritilli said.
Should inflation continue to cool and the labor market drops lower than 100,000 jobs added per month, Munger anticipates to see a decrease in interest rates happen slowly beginning later in 2024. There is work to be done in the meantime. “Securitized loans coming due in 2024 at higher interest rates could result in some opportunities for investors eager to come off the sidelines.”
At the end of the day, the Fed’s 2024 decisions will be led by inflationary metrics. As much as multifamily players would like to see cuts sooner rather than later, the story of this wave of interest rates and what they mean for the housing market remains unwritten.
“If the economy remains as strong as it is today, and inflation ceases to attenuate and even begins to grow, I anticipate that the pause could go on for some time and we may not see hikes come down to closer to the end of 2024 and even at the beginning of 2025,” Gray noted.
