February 5, 2024
By: Lennon Lee, Investor Relations Associate
As we look ahead to 2024, the multifamily market stands poised for growth. The potential alignment of stabilizing interest rates and demand for rental properties from the next generation of renters may increase transaction volumes and could create exciting opportunities for multifamily investors.
How Interest Rate Cuts Could Impact the Multifamily Market in 2024
In 2024, stabilized interest rates or potential interest rate cuts could create a more favorable environment for multifamily investors. A rate cut in 2024 would mark the first decrease since the onset of the COVID-19 pandemic, during which the Federal Reserve lowered rates to nearly zero to strengthen the economy.[1]
The Federal Reserve wields significant influence over the housing market by using monetary policy tools to shape interest rates and credit conditions. As we explore the potential impact of interest rate cuts on the multifamily market, we will investigate how they could affect financing opportunities, transaction volume, and property valuations.
Effects of Interest Rate Cuts on Transaction Volume and Financing Opportunities
Multifamily real estate has experienced prolonged investor price discovery due to significant interest rate volatility in the past year and a half. Uncertainty surrounding interest rates causes buyers and sellers to have divergent expectations, resulting in a wider bid-ask spread.
The bid-ask spread represents the gap between the highest price a buyer is willing to pay for an asset and the lowest price a seller is willing to accept. However, as interest rates begin to stabilize, more participants may enter the market, which could narrow the spread and cause increased transaction volume in 2024.
Stabilization of interest rates helps buyers and sellers find common ground on asset values, making it easier to facilitate transactions. More transactions could mean increased liquidity in the multifamily market. An increase in liquidity may then benefit sellers, who could find interested buyers more easily, and buyers, who could find more attractive investment opportunities. It creates a win-win situation, fostering a more active multifamily market.
Stabilized or lower interest rates may also create improved financing opportunities for multifamily projects. Lower interest rates reduce the cost of borrowing, making it more attractive for investors to pursue multifamily ventures. Investors can potentially secure more favorable loan terms when financing costs decrease, resulting in increased profitability and improved cash flow. This increased access to affordable financing could then further stimulate the market, spurring the growth of multifamily investments.
Potential Impact on Property Valuations
Freddie Mac’s recently released 2024 Multifamily Market Outlook provides valuable insights supporting the observations made regarding interest rate cuts. The report highlights that although the multifamily market may face strain from high levels of new supply and higher interest rates, it remains a favorable asset class given the expensive for-sale housing market and ongoing demographic trends.[2]
Although interest rates are expected to remain elevated in 2024, some stability is anticipated, which could lead to increased multifamily lending volume for the year. As interest rates stabilize, it is likely that cap rates and property values will stabilize as well.
Cap Rates
Cap rates, which measure the rate of return (as well as risk profile) on an investment property, are commonly influenced by interest rates. When interest rates rise, cap rates tend to follow suit. Conversely, when interest rates fall or stabilize, cap rates also tend to stabilize. This stability in cap rates creates a healthier investing environment by giving buyers and sellers a better sense of property values.
Stabilizing cap rates have a similar effect to stabilizing interest rates – they may facilitate price discovery as buyers and sellers can more readily agree on asset values, facilitating more potential transaction volume within the multifamily market. This agreement on asset values ensures that sellers get fair market prices for their multifamily properties, while buyers can invest with confidence, knowing that they are not overpaying.
Supply and Demand
Despite short-term challenges such as supply constraints, the overall housing shortage should continue to support the long-term growth of the multifamily market. The supply-demand imbalance in the housing market has the potential to create a strong demand for rental units, driving rental rates higher. That demand would be further amplified by an expensive for-sale housing market, which makes homeownership less attainable for many individuals and families.
Moreover, the next generation of renters entering prime renter age will contribute to the demand for multifamily properties. As Millennials and Generation Z reach the age where they start forming households, the need for rental units will continue to grow. These demographic shifts may help to provide a more stable market for multifamily investors, ensuring sustained demand for rental properties in the coming years.
A Critical Year for Multifamily Investors to Watch Interest Rates Behavior
Stabilized interest rates or potential interest rate cuts in 2024 could significantly impact the multifamily market. These changes can potentially enhance financing options, stimulate transaction volume, and stabilize property valuations. Increased transaction volume and improved financing opportunities can provide a more favorable investing environment, attracting buyers and sellers to the multifamily market.
The stability that comes with interest rate cuts could allow investors to make better informed decisions based on more predictable cap rates and property values. Monitoring upcoming developments in interest rates will be crucial for multifamily investors looking to capitalize on the favorable environment that interest rate cuts may create.
As we look ahead to 2024, the multifamily market stands poised for growth. By staying informed and adapting to the changing market conditions, investors can position themselves for success in the multifamily market of the future.
If you would like to learn more about the multifamily market or investing in our current offerings, schedule a call with our Investor Relations team today.
Sources:
- The Fed is expected to cut interest rates in 2024.Here’s how investors can prepare. cnbc.com™. (n.d.). Retrieved January 17, 2024 from https://www.cnbc.com/2024/01/03/the-fed-could-cut-interest-rates-in-2024-how-investors-can-prepare.html
- 2024 Multifamily Outlook. freddiemac.com™. (n.d.). Retrieved January 17, 2024 from https://mf.freddiemac.com/docs/2024_multifamily_outlook.pdf
