Rising interest rates remain a primary concern for multifamily property owners and operators. Their impact is felt in many ways, extending beyond increases in monthly mortgage payments to influence the overall value and profitability of multifamily investments. As interest rates remain higher than we’ve seen in recent history, property values, and purchasing power tend to decrease. At the same time, operating costs increase, threatening to throw carefully calculated investment equations out of balance.
For those with short-term loans, such as bridge loans or loans nearing maturity, refinancing at higher interest rates can shrink the borrowing capacity. Individuals who purchased multifamily properties just a few years ago and financed with short-term loans may face a scenario where their current loan balances exceed what a new loan can support. This discrepancy leaves a substantial gap. Many owners must choose between a cash-in refinance, working with their lender to modify the loan terms, or potentially selling the property for less than its original purchase price.
Potential buyers are in a similar predicament, as higher interest rates translate to diminished borrowing power. This can reduce the number of active buyers in the market and limit the amount they are willing or able to pay for a property. After all, a property is only worth as much as people are willing to pay in that market
Lending levels in flux
The Mortgage Bankers Association (MBA) released an updated baseline forecast in late October that predicts a substantial decline in total commercial and multifamily mortgage borrowing and lending for the remainder of the year and the beginning of the next. The total for 2023 is expected to fall to $442 billion, marking a 46 percent decrease from the previous year’s $816 billion. Multifamily lending alone is projected to drop to $285 billion, a 41 percent decrease from the $480 billion recorded in the previous year. However, the MBA anticipates a rebound in 2024 with a projected total of $559 billion in commercial real estate lending, including $339 billion in multifamily lending.
In every market cycle, distress presents itself, but within these challenges lies opportunity. Interest rates will eventually decrease. While it’s unlikely that they will reach the historic lows of several years ago, even a modest reduction from their peak can significantly impact property values and operating costs.
Owners and operators unable to refinance or negotiate more favorable terms with their lenders may be compelled to sell their properties, possibly at a reduced asking price. Many owners will strive to hold out for as long as possible, but this approach often leads to insufficient funds for proper property management, further diminishing property values. Operating expenses, particularly property taxes, insurance, and utilities, have surged recently, outpacing revenue growth.
While challenges arise, they also present opportunities for well-prepared and well-capitalized individuals and firms. As Warren Buffett reminds us, “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold.”
The question is: Are investors ready? This is particularly relevant for those who entered the market toward the end of the cycle and may have yet to achieve the expected returns or distributions on their portfolio. Some investors may even have suffered losses due to market adjustments. Will they wait on the sidelines and risk missing the moment when, for a brief moment, the skies open and opportunity rains down?
Click here to read the full article of considerations at play by CEO & Managing Partner Gideon Pfeffer on Inc.com to learn more about the current multifamily housing market.
For a comprehensive list of Gideon’s articles published on Inc. Masters, click here.
