While the Federal Reserve has been aggressively raising its benchmark federal funds rate, resulting in broad impacts on the U.S. economy, the multifamily real estate sector saw record investment volume of $63 billion in the first quarter of 2022, a CBRE report showed.
After four years without a rate hike, the central bank raised its interest rates from nearly 0% to a target range between 0.75% and 1% with a quarter-point increase in March and a subsequent half-point increase in May.
The root of the Fed’s hawkish monetary policy is high inflation, which was caused by increased government spending in the form of trillions in COVID-19 stimulus aid, high consumer demand, and low supply due to the pandemic and geopolitical turmoil.
By raising the fed funds rate, and making it more expensive to borrow money, the Fed ultimately hopes to bring demand and supply fundamentals closer to balance and lower the inflation rate, which was 8.3% as of April 2022 — nearly a four-decade high and significantly greater than the Fed’s typical 2% target rate.
The Fed usually increases rates by quarter-point increments, but May’s half-point increase was the first since 2000, demonstrating central bank officials’ sense of urgency to decelerate inflation. Fed Chairman Jerome Powell said additional half-point rate hikes could be possible in June and July, according to The Wall Street Journal.
Although it is anticipated that the Fed will continue to aggressively raise rates throughout the year, impacting the entire commercial real estate industry, multifamily investment demand may remain strong.
Multifamily Real Estate Investment Performance Amid Rising Interest Rates
The Fed’s rate hikes are causing banks and lenders to increase interest rates on new fixed and existing variable-rate loans, which is raising debt service for investors and potentially reducing proceeds on new loans.
The average 7/10-year fixed mortgage rate for U.S. commercial real estate was 4.3% in March 2022 after the Fed’s quarter-point rate hike that same month, according to Real Capital Analytics. This was an increase from an average of 3.7% in 2021.
Nevertheless, multifamily real estate, which includes single-family rentals (SFR) and build-to-rent (BTR) communities, outperformed other asset classes in the first quarter of 2022. Investor appetite for multifamily investments is high because of strong tenant demand as a result of record home prices and high family formation amid a national housing shortage. Additionally, multifamily assets can be an inflation hedge, and investors, who have substantial capital for real estate that wasn’t deployed last year, desire resilient assets.
U.S. multifamily’s record investment volume of $63 billion in Q1 2022 was a year-over-year increase of 56%, according to CBRE. The sector accounted for 37% of total real estate investment volume in the quarter — ahead of office (21%) and industrial (20%). Also, multifamily borrowing increased 57% in Q1 2022 compared with a year earlier, according to the Mortgage Bankers Association.
The multifamily rental vacancy rate fell to a record low 2.3% and average rents increased 15.5% in the quarter compared to the same period in 2021, CBRE’s data indicated.
The Sun Belt region commanded the top spots for multifamily investment volume over the past year, as renters continued the pattern of migrating to more affordable markets with a high quality of life, milder climates, and more spacious SFR and BTR communities. The Dallas-Fort Worth metro area led the way with $29.2 billion, and Atlanta took second place with $21.4 billion.
Notwithstanding rising interest rates, a significant amount of investor capital ready to be utilized and strong fundamentals may continue to boost multifamily real estate investment activity throughout the year.