Finance  ·  CMBS

Is Multifamily a Safe Haven Amid Rising Interest Rates?

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As the world economy navigates the challenges posed by rising interest rates, multifamily housing has emerged as an increasingly popular choice for investors and renters alike. This article delves into the reasons behind the heightened demand for multifamily housing in such an environment. CRED iQ’s research team dug into the data to see if sentiments have evolved.  

When examining different metropolitan statistical area (MSA) tiers, we’ve noticed that Fannie Mae (FNMA) originations have remained relatively stable since 2019. Despite the Federal Reserve’s more aggressive stance to combat inflation since the first quarter of 2021, the multifamily sector continues to show resilience. This suggests that its performance is influenced more by the dynamics of supply and demand rather than interest rates alone.

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In the primary markets, when we examine the past 36 months, we observe a significant decrease in multifamily issuance in Dallas-Fort Worth, Philadelphia and San Diego. Secondary markets such as the San Bernadino, Calif., market have experienced a significant downward trajectory since 2020, while tertiary markets have demonstrated resilience over the past 36 months, with certain MSAs like Palm Bay and Sarasota, Fla., showing modest increases.

The New York MSA has experienced a significant decline in multifamily issuance. In 2019, this MSA saw $5.3 billion of Fannie Mae issuance, but, in 2022, due to market changes, Fannie Mae issued only $2.9 billion. This represents a substantial 45 percent decrease in issuance over that period.

On a loan-by-loan basis, it is evident that there has been a consistent increase in Fannie Mae loan note rates, corresponding to the substantial rise in the Secured Overnight Financing Rate (SOFR) over recent years. In 2020, the average loan original note rate was 3.08 percent, while SOFR averaged 21 basis points. In the current market, we’ve observed a direct impact on loan original note rates, which now average 5.7 percent, with the 30-day average SOFR rate at 4.38 percent as stated by the Federal Reserve Bank of New York.

Upon closer examination of loan-level data, we observe that variables like debt service coverage ratio (DSCR) and loan original note rates continue to experience stress when compared to today’s loan originations. 

Despite changing economic conditions, multifamily properties are considered a stable asset class. Here are some compelling attributes of multifamily real estate.

• Stable income streams

In a rising interest rate environment, investors often seek assets that provide stable income streams to offset the potential decline in the value of their bonds and other investments. Multifamily housing, such as apartment buildings and complexes, offers exactly that. Rental income remains consistent and often increases over time, making it an attractive choice for investors looking for a secure source of cash flow.

• Diversification benefits

As interest rates rise, investors tend to seek asset classes that are less correlated with interest rate movements. Multifamily housing investments can provide an effective diversification tool for portfolios dominated by stocks and bonds. The value of multifamily properties is driven more by supply and demand dynamics and local market conditions than by interest rates, making them a valuable hedge against market volatility.

• Resilience in economic downturns

The demand for multifamily housing remains relatively consistent even during economic downturns. In times of economic uncertainty, people often opt for renting over homeownership as it offers greater flexibility. This characteristic makes multi-
family housing an appealing investment choice in a rising interest rate environment, where concerns about the economy may lead to reduced consumer confidence in purchasing real estate.

• Urbanization and population growth

Urbanization and population growth are ongoing trends in many parts of the world. This has resulted in increased demand for housing in urban areas, where multifamily housing is a prevalent choice due to space constraints and the need for affordable living options. As urban areas continue to grow, the demand for multifamily housing units remains strong, irrespective of the interest rate environment.

• Younger demographics

Younger generations, particularly millennials and Generation Z, have shown a preference for renting over homeownership. Factors such as student debt, job mobility, and a desire for a more flexible lifestyle contribute to this trend. As these demographics comprise a significant portion of the renter pool, multifamily housing investments continue to thrive, regardless of interest rate fluctuations.

• Amenities and community living

Multifamily housing complexes often provide a range of amenities, such as fitness centers, community spaces, and shared outdoor areas. In a rising interest rate environment, these amenities can be particularly appealing to renters, offering them added value for their money and a sense of community that may be absent in single-family homes or other rental options.

• Professional management

Multifamily housing properties are typically managed by professionals with experience in the rental market. This ensures that tenants are well-served, maintenance issues are promptly addressed, and the property is efficiently run. For investors, this professional management provides peace of mind and minimizes the need for hands-on involvement.

As we’ve observed from data published by the Federal Reserve Bank of New York, SOFR has risen from a 30-day average of 21 basis points in 2020 to 4.87 percent in 2023. Interestingly, multifamily loan issuance has remained strong despite the increasing interest rates. In 2021, there was approximately $67 billion in Fannie loans originated; 2022 saw approximately $69 billion in originations while SOFR increased by 1.4 percent.

Fannie has already issued around $42 billion in multifamily loans year-to-date, even with the 30-day average SOFR rate standing at 4.87 percent. Mortgage rates have surged beyond 7 percent, but the demand for multifamily properties remains robust.

Harry Blanchard is managing director and head of data and analytics at CRED iQ.