When it comes to U.S. politics, people get pretty riled up, wouldn’t you agree? Well, when you are sitting in my chair, running several multifamily real estate investment funds and responsible for a team of hard-working people, it doesn’t matter whether I love the newly re-elected President Trump or hate him, it is my job to do my best to navigate whatever I think is coming next, without political bias. That is what I am going to write about. If you were hoping I would praise President Trump or trash him, please accept my apology in advance.
When you run a multifamily investment fund, what matters most is interest rates. Will they go up? Will they go down?
As a reminder, when rates go up, prices of multifamily real estate (and most types of real estate) go down. When rates go down, prices for multifamily real estate go up. The reason this happens is simple. When interest rates are lower, your loan payment is lower. When your loan payment is lower you can take out a larger loan which means you can pay more for a piece of property than you could if the rates were higher, and the loan payment was higher.
Said another way, the value of multifamily real estate is dependent on its ability to generate cash flow. If that property can support a higher loan amount, then it stands to reason that someone will probably be willing to pay more for that property, assuming it is in a good area and it’s a desirable property.
Now that we are all on the same page, what I care most about, is where interest rates are going to go over the next 12, 24, or 36 months. Many economists are currently predicting that the economy will remain quite strong and as a result there will be upward pressure on inflation. They argue that The Fed will not be able to lower rates much more, especially if inflation does not continue to come down. In addition, it is possible that the implementation of tariffs by the incoming administration could also put upward pressure on prices. It is true that the arguments being made for higher interest rates for a longer period seem compelling.
Alternatively, most of the inflation that we experienced coming out of the pandemic was a result of supply side shortages. Interest rates don’t have much of an effect on the supply side of the economic equation. So, it is very possible that if inflation continues to moderate as the Fed has expected over the past few months, they may continue too slowly reduce interest rates. If the market believes that, over the long run, rates will be lower, then the longer-term treasury rates will likely come down which is what every real estate investor is hoping for.
Unfortunately, the current level of interest rates has locked up the real estate market (and the private equity market in general for that matter). There are plenty of people who want to sell their multifamily properties, but they don’t want to sell at the current prices. When there are no sellers, there cannot be buyers. The only deals that are getting done right now are deals that have some distressed component to them. Most of the stress is coming from variable interest rate loans, but even those who are under distress are getting extensions from their debt fund lenders. At some point even these lenders will grow tired of granting extensions and will force the sellers’ hand if rates don’t come down soon.
OK, I have presented two sides of this issue. What do I think is going to happen over the next 12 to 24 months? Well, obviously I don’t have a crystal ball but based on everything I know right now I do believe rates will likely be higher for longer than we anticipated even six months ago. Only time will tell.
Ken Gee Is the founder and managing member of KRI Partners. KRI helps people create wealth through real estate. Whether you want to passively invest in multifamily real estate or do your own deals, KRI can help you. For more information, please call or text (216) 290-1710. Or visit us on the web at https://www.kripartners.com.