If Rents Go Up, Do Rates Go Up?

[Justin Moy]

The demand for apartments continues to grow, making the multifamily sector thrive nationwide. But rising interest and cap rates are affecting lenders and investors.

Interest and cap rates refer to the amount of money that banks charge to lend money and the rate of return that investors expect to receive. These rates are increasing, making it more difficult for investors to make a profit.

Tom Noble, a capital expert, thinks that rental growth needs to go down for the market to improve. This is because rents are a significant part of the inflation metric that the Fed looks at.

The market is good for lenders, but it’s a different story for investors. Multifamily investors are finding it difficult to structure their investment. For long-term investors, the key is to source the right type of capital.

As the economy changes, deal terms and strategies are changing too. Deals now have more cash flow challenges, meaning investors need to have more reserves upfront.

Panelists at the GlobeSt’s Spring Multifamily Conference agree that rents have to decline before rates improve.

Despite these challenges, the panelists are optimistic about the long-term growth of the multifamily sector.

[Evan Polaski]

While I don't agree that rents need to go "down" in a true sense, they do need to slow down.  

Shelter make up close to a third of the overall inflation number, as of February's numbers.  Given Jerome Powell is looking to hit 2% inflation (not in the 2's, but 2.0%), and Shelter was 8.1% year-over-year in February, or about 3% of the total number, we either need shelter growth to cool dramatically, or everything else to come out at -1% with shelter contributing about 3%, bringing a total of 2% to hit Jerome's target (unlikely scenario, but mathematically possible).