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Fed rate cut in 2025 could unblock multifamily deal flow

Posted on by L. Dreeye
Fed rate cut in 2025 could unblock multifamily deal flow

High financing costs and a low cap rate have sidelined many multifamily investors, but the Federal Reserve’s approach to lowering interest rates could be the key to unlocking deal flow in 2025. The likelihood of a rate cut by the end of the year has increased, according to a new report from Northmarq. has boosted investor sentiment and may even encourage more housing construction in the future.

Inflation is falling and unemployment is stabilizing, which could persuade the Fed to keep rates steady in 2025, said Jeffrey Munoz, a vice president at Northmarq. However, construction and acquisition financing costs are expected to take longer to adjust, which could gradually encourage more new apartment construction.

“While current rates are at their highest levels over the past 17 years, this is not unprecedented. During this period, we experienced the Great Recession, the global debt crisis, and COVID-19, all of which put downward pressure on these markets. indexes”.

The recent rise in rates above the 10-year Treasury yield also creates attractive risk-adjusted yields for investors, whether they borrow or seek long-term ownership of multifamily assets.

Average interest rates on new multifamily buildings are currently around 5%, while rates on Class B and C assets in some markets reached levels of 6% to 8% in October, making yields more favorable relative to Treasury yields bonds.

Investors are cautiously optimistic, Northmark said, seeing the trend as an opportunity to re-enter the market as financing costs stabilize along with potential increases in property values. Raising cap rates has also made higher borrowing costs more manageable, giving investors better balance when considering deals.

Northmarq’s report follows a recent Yardi Matrix analysis that found U.S. multifamily sales remained stable at approximately $34 billion during the two years ending July 31, 2023. That compares with $200 billion in sales a year earlier, highlighting the extent to which high borrowing costs continue to deter investors.