Interest Rate for Multifamily

[Zaid Bender]

How do you forecast the interest rate in the Multifamily and how is it going to affect cap rates and prices?

[Spencer Gray]

@Zaid Bender I assume you are referring to the interest rate on multifamily loans. I don't try to predict interest rates or cap rates in the future. We use current rates and then apply sensitivity analysis for an exit period that shows us a range of potential outcomes depending on macro forces that are outside out control.

Cap rates and interest rates, specifically the US 10 year treasury are relatively correlated, with cap rates lagging behind rate movements. This is because your typical Fannie/Freddie loan will base their rate on a spread over the 10 year treasury - if rates are low you can borrow more money cheaper which facilitates higher prices with relative yield, driving cap rates until there is more equilibrium. 

Predicting rates over the next year or over the next 10 years is next to impossible. 

That being said we do know that the Federal Reserve is committed to keeping the benchmark Fed Funds rate near 0 for the foreseeable future. The Fed has more direct influence on shorter term bonds, although if later maturing bonds like the 10YT start to rise quickly for whatever reason, the Fed could ramp up their purchasing over those notes to control the yield curve and prevent rates from running.

There is massive incentive from central banks and governments to keep rates low for as long as possible, and only raise them in the face of rampant inflation. There is far too much debt in circulation that cannot be serviced if interest rates rose dramatically and borrowers had to refinance at higher rates. The biggest borrow, the US Federal Government, is acutely aware of this, so is the Federal Reserve. 

I imagine rates will stay low, with some fluctuations up and back down. Rates have been declining since they peaked in the mid 1970's, which was an aberration from a multi century long trend of declines. They will rise again, at some point, which will likely topple the house of cards that the global economy is built on. But is that 1 year, or 100 years? It's such an unknown that it is almost not worth considering.